After a bruising year marked by soft earnings and fickle investor sentiment, the UK equity market is quietly repositioning itself for a rebound in 2026, according to a new strategy note from UBS.
The Swiss bank argues that the FTSE 100 and FTSE 250 are entering the new year on firmer footing than many investors expected, with purchasing managers’ indices (PMIs) for both indices now solidly in expansion territory.
UBS strategist Sutanya Chedda describes this shift as a “quiet reset” for UK equities, supported by stabilizing macroeconomic activity, improving earnings prospects, and enduring valuation discounts versus continental Europe.
“This regime mix of strengthening activity and subdued risk pricing creates a favourable base for selective equity exposure,” UBS wrote.
UK large- and mid-cap stocks spent much of 2025 in the market’s penalty box. Like-for-like earnings for 2025 were repeatedly downgraded, especially in sectors sensitive to domestic demand and real wage growth. Yet the worst appears to be over.
UBS now expects a broad-based recovery in 2026, led by materials, utilities, and industrials, as well as information technology.
At the stock level, names like GSK PLC (LSE:GSK, NYSE:GSK), ConvaTec Group PLC (LSE:CTEC), Halma PLC (LSE:HLMA), IMI PLC (LSE:IMI), Computacenter PLC (LSE:CCC) and Informa PLC (LSE:INF) are identified as well-positioned to benefit from both operational quality and improving sentiment.
Conversely, Drax, Victrex, and Diageo were among those showing weaker tactical setups, according to UBS’s composite scorecard.
Valuations remain the UK’s most compelling asset, UBS said. The FTSE 100 and FTSE 250 continue to trade at stubborn discounts to the MSCI Europe on forward price-to-earnings ratios. These discounts are not just confined to struggling names but extend across high-quality, cash-generative firms, particularly in the mid-cap space.
The UK’s return-on-equity (ROE) advantage, fueled by financial leverage, is still intact. With earnings expected to recover, the persistence of deep valuation gaps presents a compelling risk/reward for long-term investors, UBS argued.
Among specific opportunities, the bank highlighted food retailers Tesco PLC (LSE:TSCO), J Sainsbury PLC (LSE:SBRY) and Marks and Spencer Group PLC (LSE:MKS) as beneficiaries of a Budget that boosts lower-income consumption while reducing demand at the premium end.
UBS maintains a Buy rating on 3i Group PLC (LSE:III) (III LN) with nearly 37% upside from current levels, citing the long-term growth story of its key asset, Action. Despite a slowdown in France that’s likely to persist into early 2026, the bank expects Action to maintain its store expansion strategy and return to 15–17% annual sales growth.
By contrast, Bunzl PLC (LSE:BNZL), Drax Group (LSE:DRX) and Victrex PLC (LSE:VCT) sit in UBS’s 'sell'-rated bucket, reflecting either limited upside, negative earnings revisions, or sectoral headwinds.
Contrarian HOLT ideas, companies without a UBS Buy rating but ranking high on quality or valuation, include JD Sports Fashion PLC (LSE:JD., OTC:JDSPY), B&M European Value Retail SA (LSE:BME), Telecom Plus PLC (LSE:TEP) and Chemring Group (LSE:CHG).
Despite these tailwinds, UBS notes that sentiment toward UK equities remains fragile.
While large-cap funds have begun to see inflows, smaller and mid-sized companies continue to face outflows and light passive engagement.
Within sectors, crowding remains a risk: industrials and staples are overweight, while real estate remains under pressure due to interest rate sensitivity.
Should macroeconomic data continue to surprise to the upside, UBS believes even modest improvements in sentiment could drive incremental capital back into the UK, particularly into undervalued cyclicals and quality mid-caps trading at steep discounts.