UK equities are deeply undervalued and under-owned, presenting a strong opportunity for medium- to long-term investors, UBS believes.
While recent economic data is far from sparkling, things are improving and the Swiss bank highlighted the FTSE 250 and UK consumer sectors as having strong rebound potential worthy of investment.
In a note to clients this week, UBS strategists noted that UK inflation eased in May and the Bank of England is expected to resume rate cuts in August, creating a more favourable mood, with ongoing headwinds indicated by PMI reports already priced in by the market, "skewing the risk-reward positively for UK equities over the next 12-18 months".
On earnings, UBS highlights a "two-step story of near-term caution but medium-term optimism."
While EPS growth forecasts have been cut back across most UK sectors, reflecting slower economic growth and cost inflation weighing on profits, the outlook for 2026 has "turned more positive," with many sectors seeing profit outlooks lifted.
A main trade for UBS is favouring the FTSE 250 over the FTSE 100.
“The UK SMID-cap universe (FTSE 250) shows far stronger earnings growth potential than the FTSE 100 or Europe,” the strategists say, with domestically oriented midcaps poised for a sharper earnings recovery, partly due to easier comparisons and more cyclical exposure.
UK equities trade at significant discounts to European peers on both price-to-earnings and price-to-book valuations, while the UK-focused companies of the FTSE 250 in particular offer "exposure to high quality businesses at lower valuations than their large-cap peers".
Market sentiment remains weak, with substantial outflows from UK equity funds that has made the FTSE 250 under-owned, setting the stage for a potential contrarian "buy Britain" strategy.
"Any easing of UK pessimism (for instance on clearer economic policy or inflation) could see outsized inflows return to this under-loved market," providing "a powerful catalyst given the valuation backdrop."
On positioning, UBS highlights that investors are crowded in defensives like consumer staples, and in financials and materials, ie banks and miners, while under-exposed and short on mid-cap oil producers and health care.
This suggests that some cyclical and UK-centric segments, suchg as mid-cap consumer discretionary, smaller energy producers, healthcare innovators may in particular be under-owned.
As well as liking the FTSE 250, UBS also recommends UK consumer-related sectors such as retail, leisure, travel, and housing, which are “under-owned and valuations are correspondingly depressed” but are forecast to rebound as the cycle turns.