FTSE 100 backed to go higher, despite UK uncertainty

UK recession warnings are getting louder, but that’s not stopped UBS from predicting further upside for the FTSE 100 index on top of its recent outperformance.

The FTSE 100 index has been backed to finish the year at 7,700 after a leading bank said it continued to rate the UK as its “most preferred” major stock market.

London’s top flight is up 1.4% this year at around 7,488 and UBS’s Global Wealth Management sees no reason why this outperformance over other major global indices should be curtailed by the UK’s deteriorating economic outlook.

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It notes that the resilience has continued even after the Bank of England warned last week of a recession lasting five quarters and peak-to-trough GDP decline of at least 2%.

And even though the risks to global growth have also risen, UBS is encouraged that levels of activity appear to be holding up after recent figures pointed to strength in the US jobs market and robust China export growth.

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Some of the factors behind London’s robust performance are well known as FTSE 100-listed companies generate some 75% of their revenues outside the UK. 

The weaker pound and sharp rises in prices of commodities, especially oil, have also contributed to the FTSE 100’s new-found status as a global pacesetter.

Value sectors such as energy, basic resources and financials account for about 40% of the index and have benefited from higher interest rates and prices so far in 2022.

In addition, domestic growth concerns have led to strong performance of the defensive healthcare sector, which has a roughly 14% weight in the index.

US 10-year real yields are up by around 200 basis points between the end of 2021 and mid-June, but unlike the S&P 500 the impact on the UK market has been muted since technology accounts for less than 1% of the FTSE 100.

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UBS expects the UK market to deliver one of the highest earnings growth rates this year at about 12%, with continued sterling weakness providing a tailwind. Amid faltering output and an energy supply shortage this winter, UBS is forecasting that the pound will fall to 1.15 against the US dollar by the end of 2022 from 1.21 currently.

From a valuation perspective, UBS notes that the FTSE 100 trades on a 12-month forward price/earnings multiple of 10.2x for a 34% discount to the MSCI All Country World index.

UBS chief investment officer Mark Haefele said: “We continue to rate the UK as most preferred and see a modest 4% upside, targeting the FTSE 100 at 7,700, by end-2022.

“However, we recommend broad-based exposure to the UK equity market as we believe that sector leadership will be more mixed in the coming months.”