UBS Upgrades US and UK Stock Markets, Downgrades Europe

UBS upgraded US and UK stock markets while downgrading Europe, as revealed in a Tuesday note.

UK Market Upgrade

The bank increased UK equities to Overweight, based on the sector-adjusted price-to-earnings (P/E) ratio which stands at a 25% discount relative to the MSCI AC World index. UBS highlights that UK markets are defensive and could benefit from a stronger dollar. The bank’s GDP growth forecast for the UK is above consensus, coupled with lower-than-consensus projections for interest rates, contributing to a positive outlook.

UBS strategists, led by Andrew Garthwaite, noted that the UK market has less ‘Trump’ risk compared to other non-US markets. They identified domestic sectors such as retailing, banks, homebuilders, and brick manufacturers as attractive, with several undervalued stocks including Relx PLC ADR, Experian PLC, Smith & Nephew, and Imperial Brands.

US Equities Outlook

In regards to US equities, UBS cited favorable conditions during global growth slowdowns, citing the low operational leverage, flexible labor market, and the Federal Reserve's dual mandate. While acknowledging potential benefits from policy changes under the Trump administration, UBS refrains from issuing an Overweight rating due to high valuations relative to global markets. Concerns linger about a slowdown in GDP growth and the impact of a strong dollar on earnings revisions.

Europe Downgrade

Despite downgrading Europe to Benchmark, UBS advises against underweighting European equities. The downgrade stems from poor earnings and economic momentum. Nevertheless, the European sector-adjusted P/E ratio indicates a significant discount compared to the US. Expectations for narrowing GDP growth between the US and Europe, anticipated rate cuts by the European Central Bank, and a potential weaker Euro are seen as catalysts for improvement.

Caution on China

UBS remains cautious on China but notes possible near-term improvements in Chinese lead indicators.