Undervalued UK equities offer medium-to long-term opportunity: UBS

Investing.com -- U.K. equities remain "deeply undervalued and under-owned," presenting a medium- to long-term investment opportunity, according to UBS strategists. 

While near-term macro indicators are soft, the bank highlights the FTSE 250 and U.K. consumer sectors as key areas with rebound potential as fundamentals improve.

“Valuation discounts, improving quality metrics, and a favourable 2026 earnings outlook set the stage for a contrarian "buy Britain" strategy, focused on mid-cap domestics and consumer plays,” UBS strategists led by Sutanya Chedda said in a Wednesday note.

Despite persistent economic headwinds, including contractionary PMIs and cautious investor sentiment, UBS believes these risks are largely priced in, improving the risk-reward outlook for U.K. stocks over the next 12–18 months.

Earnings expectations for 2025 remain muted across most sectors, reflecting the impact of slowing growth, high rates, and cost inflation.

However, 2026 forecasts point to a recovery, particularly for the FTSE 250, which UBS says has “far stronger earnings growth potential than the FTSE 100 or Europe.”

“This signals that domestically oriented midcaps are poised for a sharper earnings recovery, partly due to easier comparisons and more cyclical exposure,” the analysts added.

Valuation also supports the bull case. UBS points out that U.K. equities continue to trade at a discount to European peers on both price-to-earnings and price-to-book metrics.

The FTSE 250, in particular, provides exposure to quality businesses at depressed valuations, still lagging recovery from the 2016 Brexit-driven de-rating.

Investor positioning further strengthens the case, according to UBS. “Market sentiment towards U.K. equities remains bleak,” the note says, with both large-cap and SMID-cap funds seeing sustained outflows.

The bank argues that any easing in macro pessimism “could see outsized inflows return to this under-loved market.”

UBS recommends two key strategies: overweighting the FTSE 250 over the FTSE 100, and increasing exposure to U.K. consumer sectors such as retail, leisure, and housing.
These areas have suffered from inflation and low confidence but may benefit from improving real incomes and infrastructure investment.

The FTSE 250 trade “capitalises on upside in ‘unloved’ British companies at a time when value, growth and improving fundamentals are aligning in the midcap space,” analysts said.

For the consumer trade, they said the outlook is “brighter than current sentiment may imply,” with domestic cyclicals being underowned and valuations “correspondingly depressed.”