In a notable shift, Citigroup has upgraded UK equities to 'overweight', highlighting their defensive characteristics and attractive valuations amid escalating global trade tensions.
This move positions the UK alongside Japan, which also received an upgrade, reflecting a broader strategy to diversify away from US markets.
The decision comes as Citigroup downgrades American equities to 'neutral', citing concerns over President Donald Trump's recent tariff policies and their potential impact on corporate earnings.
The bank's strategists point to the US market's high valuation (trading at approximately the 80th percentile historically) and a proprietary Earnings Revision Index that has reached recessionary levels of -40%, suggesting a heightened risk of earnings downgrades.
Citigroup's analysts note that the UK's market composition, with a significant weighting in defensive sectors, could provide resilience in the face of ongoing volatility.
They also observe that Japanese equities appear undervalued and may be less susceptible to U.S. trade policies.
The bank maintains an 'overweight' stance on continental European equities, supported by anticipated fiscal stimulus and potential rate cuts from the European Central Bank.
Conversely, emerging markets have been downgraded to 'underweight', reflecting concerns over their exposure to current tariffs and the possibility of sustained trade barriers.
In terms of sector preferences, Citigroup favours Technology for growth, Financials for cyclical exposure, and Health Care as a defensive play.
The bank anticipates continued market volatility due to macroeconomic and policy uncertainties but suggests that progress in trade negotiations, particularly with China, could lead to a significant rebound by year-end.