UK equities “low cost for a purpose” – UBS

Investing.com – UK equities have carried out comparatively poorly this 12 months, however traders ought to be cautious of the resultant valuation, in keeping with UBS, because the indices are “low cost for a purpose.”

The UK benchmark FTSE 100 index has gained 7.7% to date this 12 months, however this compares badly with the German DAX, up 21.6%, the S&P 500 within the US, up 27.7% and the Nikkei in Japan, up 17%. 

“The UK market, the FTSE 100 specifically, seems ‘low cost’ when in comparison with different markets, in addition to its personal historical past,” mentioned analysts at UBS, in a observe. 

“At the moment buying and selling on a ahead price-to-earnings (P/E) valuation of 11.4x in comparison with its long-run common of 12.8x, and with earnings showing to be bottoming out, is now the time for the FTSE to shine? Sadly, the earnings story that helps the market’s valuation, whereas bettering, isn’t doing so sufficient to drive the index increased, in our view.”

The inventory market and the economic system are two various things, the Swiss financial institution added. Whereas the UK economic system is ready to do comparatively nicely subsequent 12 months, thanks in no small half to the sizeable fiscal stimulus not too long ago introduced by the chancellor, the identical can’t be mentioned for UK shares.

Following latest firm outcomes, UBS sees a slower earnings restoration than beforehand, forecasting a decline of -3% for the present 12 months, as a substitute of the earlier 0%, and solely a modest +5% in 2025 (beforehand 7%). 

“This mushy outlook for earnings is partially attributable to softer commodity costs, disappointing gross sales to China, and dangers to international development from the specter of increased commerce tariffs beneath the brand new US administration,” UBS mentioned.

The financial institution additionally questions how “low cost” the valuation of the UK market actually is. 

“In our view, headline UK fairness valuations will not be as enticing as they first seem, as a lot of the “worth” is discovered within the financials (8.6x ahead P/E) and power (7.7x ahead P/E) sectors. Earnings development may very well be in danger for each sectors from falling rates of interest within the case of the previous, and a continuation of weak oil and fuel costs for the latter.”