UBS expects a 13% rise if international investors are lured back if a deal is struck.
Investors backing a recovery for pandemic-hit London shares were given a boost today when a leading City bank forecast a target of 7,200 for the FTSE 100 index at the end of 2021.
UBS’s estimate for a 13% upside from current levels is based on its central scenario that international investors will return to the UK on the back of a trade deal with the EU.
The UK market has been one of the worst performing globally since the 2016 Brexit vote, with its relative valuation to Europe on most metrics at or close to 20-year lows.
UBS says that this extreme valuation discount is not just down to one or two sectors, but actually widespread. It found that 18 out of 24 sectors currently trade on larger price/earnings discounts to their European peers than their 15-year average.
With a forecast dividend yield of 3.9% for 2021, UBS’s year ahead outlook points to a total return of 17%. The bank said: “We are more bullish on the outlook for the UK than for broader Europe given the starting point of sharp underperformance, attractive valuations and better earnings momentum.”
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It is forecasting earnings per share growth of 32% in the UK next year, but with the most obvious downside risks to its forecasts still being the potential for further Covid-19 lockdowns or a no-deal Brexit in the coming days.
The investment bank is also upbeat about the prospects for Europe’s Stoxx600, where it is looking for an 8% price upside to 420. The potential catalysts include faster vaccine progress, greater fiscal support and the rotation out of fixed income into equities.
The greater chance US investors will return to Europe reflects forecast earnings per share growth noticeably above Wall Street’s for the first time in 17 years. This is largely due to a base effect after 2020 weakness. Eurozone gross domestic product is forecast to bounce back by 5.2% in 2021 as pent-up consumer demand and the unwinding of extremely high savings ratios drive growth.
Based on the relative performance of those European stocks most exposed to a pandemic recovery, UBS thinks markets are about two-thirds of the way to pricing in a vaccine. Value stocks in Europe are up by about 15% since the first positive vaccine news on 9 November, after an underperformance of 47% from January to that date.
The bank recommends investors still avoid taking all-out value positions and instead focus on those stocks most impacted by recent mobility restrictions.
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European energy and beverages are two sectors picked for attention by UBS after they were both upgraded to “overweight”. While there are challenges around the energy transition, the bank believes the market has been too extreme on a potential collapse in oil demand and that the sector should bounce back.
UBS added: “Energy decoupled from oil prices and we see potential for narrowing that gap. Beverages is the second-worst performing defensive this year (behind telecoms) in large part due to mobility, and we believe that could reverse.”
UBS has also downgraded the pharmaceutical sector to neutral owing to currency headwinds and the tougher environment for defensive stocks. It has lowered general retail to neutral and tech hardware to underweight amid signs its earnings per share cycle is ending.
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