According to UBS, UK remains as most preferred market

The team provided several arguments in favour of its optimistic assessment, including the strengthening prognosis for global manufacturing, which is anticipated to have a favourable effect on industrial metals and oil prices and increase earnings for the UK's commodity-related industries.

Furthermore, they see better prospects for domestic spending, bolstered by stabilising prices and a robust labour market.

The strategists at UBS wrote in the paper that "the latter should allow the Bank of England to start cutting rates from August onward, which should help equity valuations recover from currently low levels."

"We believe that the UK economy will grow at a faster rate of 1.5% in the upcoming year, and this, along with our optimistic outlook for oil and industrial metals, should help FTSE 100 earnings to rebound," they continued.

UBS projects 4% increase in 2024 (as opposed to the consensus of 2% growth) and 7% growth in 2025 (as opposed to the consensus of 8% growth) for corporate earnings, which fell 11% last year. The bank says that UK shares are in a favourable environment due to the accelerated rise in earnings, the relaxation of monetary policy, and the attractive valuations.

The price-to-earnings ratio (P/E) of the FTSE 100 is now 11.6x, offering a 3.9% dividend yield. This can be seen as favourable when compared to the average forward P/E over the long term, which has been 12.8 times since 1987.

UBS outlined the three primary areas for investing in the UK equities market

In particular, the bank advises preparing for a recovery driven by consumers in the midst of a strong labour market and normalising inflation, which should allow the Bank of England to begin reducing interest rates in August.

Furthermore, they like UK banks over those in the Eurozone as they anticipate an improvement in net interest income in 2024.

Additionally, "underappreciated UK quality stocks" with respectable growth potential, good free cash flow, robust balance sheets, and high and consistent returns are preferred by strategists.

Lastly, considering the previously mentioned variables, UBS presented both upward and downward scenarios for the FTSE 100 by December 2024.

Assuming an optimistic outcome, the bank sees an increase in commodity prices (especially those of oil, gas, iron ore, and copper), stronger global economic growth, a weaker sterling that helps FTSE 100 companies whose 75–80% of revenue comes from outside the UK, and a rerating of UK valuations to lessen the discount against global equities. The target level here is 9,200.

The downside scenario, on the other hand, aims for 7,000 and is driven by declining commodity prices. This would have a detrimental effect on profit growth, considering the substantial contribution of the commodities sector to FTSE 100 earnings.

(Sources: investing.com, reuters.com)