UBS says U.K. equities aren’t just value plays anymore

Investing.com -- U.K. equities are no longer just a discount story as earnings momentum and market dynamics shift, according to UBS.

While the FTSE 100 index has stayed remarkably stable through macro volatility, strategists highlight signs of rotation, particularly in the FTSE 250, which has “turned a corner, moving into expansion after four months of recovery with financials in the driver’s seat.”

“The economy still has potholes, but the broader message from our regime maps is that conditions are no longer deteriorating,” a team led by Sutanya Chedda added.

The bank says the U.K. stands out for its earnings profile, with 12-month momentum now surpassing that of Europe.

FTSE 250 earnings are projected to grow faster in 2025 than the FTSE 100 and the STOXX 600, with 2026 forecasts pointing to a broader rebound. This widening gap between large caps and smaller, more domestically exposed stocks suggests a shift in leadership.

On valuations, U.K. shares remain inexpensive relative to European peers, especially in the mid-cap space.

But UBS notes that “value alone isn’t enough anymore.”

“The market is starting to differentiate across quality, momentum, and ownership,” strategists added.

Large caps are closer to long-term averages, while small and mid-caps still trade at steep discounts.

Flows and positioning continue to favor big names. Passive allocations into U.K. large caps are still rising, while outflows persist in SMIDs despite their stronger earnings and cheaper valuations.

Investors remain overweight large-cap technology, industrials, and materials, while underweighting SMID healthcare. UBS argues that if positioning shifts, “performance may accelerate from here.”

The bank outlines three trade themes. The first is “FTSE 250 vs. FTSE 100: Small Cap, Big Upside.”

Strategists argue that “U.K. mid-caps offer stronger earnings momentum, cleaner macro exposure, and more leverage to a domestic recovery than the globally heavy FTSE 100.”

“This trade rides the SMID re-rating wave while skirting global uncertainty,” they added.

The second theme is “QARP: Cheap But Cheerful.” The team highlights that “in a market that’s cautious and unwilling to overpay, we prefer companies with a solid balance sheet, stable margins, decent earnings visibility, and trading at undemanding valuations.”

These are typically cash-generative mid-caps, many domestically oriented, benefiting from easing financial conditions and offering “exposure to both quality fundamentals and valuation re-rating potential without needing a macro miracle.”

Finally, “Tariff-Free Yield” focuses on income. This theme centers on high-yielding U.K. companies whose dividends are homegrown, providing steady income while avoiding the risks of global trade tensions or currency volatility.