Barclays: Retail buyers likely drove the latest leg of the rally
Investing.com -- UK equities continue to show resilience despite a mixed economic backdrop, according to UBS analysts on Tuesday, with the FTSE 100 recently breaking above the 9,000 mark to reach a record high.
June inflation came in hotter than expected at 3.6%, up from 3.4% in May, challenging hopes for immediate interest rate cuts.
Despite this uptick, economists still anticipate the Bank of England will cut rates by 25 basis points to 4.0% in August, supported by signs of easing in the labor market.
UBS analysts note that the U.K. economy remains in a delicate position, expanding just 0.5% in the three months to May, with a monthly contraction of 0.1% in May.
Business surveys indicate sluggish conditions, with June’s composite PMI barely above the 50 mark that separates growth from contraction.
U.K. profit trends show notable sector divergence. Overall earnings revisions have been mostly negative, with analysts trimming 2025 forecasts.
Consensus now expects modest EPS growth of approximately 2% for the FTSE 100 and 15% for the FTSE 250 in 2025, with improvement anticipated in 2026.
Energy and materials sectors have experienced significant negative earnings momentum due to last year’s high base and softer commodity prices. Meanwhile, more domestically oriented and defensive sectors like financials and utilities are showing relatively stable or improving earnings prospects.
Valuation metrics continue to favor U.K. equities, which trade at attractive levels both in absolute and relative terms.
While U.K. large caps have outpaced the Stoxx 600 year-to-date, narrowing the valuation gap slightly, the discount remains wide by historical standards. UK small and mid-cap stocks (SMIDs) continue to offer particularly compelling value.
Market sentiment toward U.K. equities has improved in July, with active flows turning more positive compared to the skepticism seen in June. High-profile milestones like the FTSE 100’s record high and easing rate fears have contributed to this shift in investor perception.
Looking ahead, UBS analysts see potential in U.K. midcaps over large-caps for the next phase of the market cycle.
The FTSE 250, dominated by domestic-facing businesses, trades at a significant discount to both the FTSE 100 and global peers, while offering exposure to a potential UK economic recovery.