Citi Downgrades UK Equities to Underweight Amid Broadening Global Growth

Citi Research has downgraded UK equities to “underweight” from a previous “overweight” rating, citing the market's defensive and commodity-heavy composition as a disadvantage in an environment of broadening global earnings growth.

Rationale for the Downgrade

Strategists at the bank noted that while the UK market had served as a useful "geopolitical hedge" during recent conflicts, that rationale has faded as tensions have eased. The report states that the market's structure is now "less appealing in an environment where earnings growth and market leadership are broadening."

Despite the downgrade, Citi acknowledged that UK valuations remain attractive. The FTSE 100 trades at 12.2 times forward earnings, which places it in the 43rd percentile of its historical range and makes the UK the cheapest major market in relative terms, according to the research.

Global Strategy Shift

The move is part of a wider strategic reallocation by Citi away from defensive assets and toward more cyclical opportunities. In the same report, the bank upgraded Japanese equities to “overweight,” calling the market an attractive beneficiary of improving cyclical conditions and its exposure to the artificial intelligence investment cycle.

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The U.S. market remains Citi's preferred region with an “overweight” rating, supported by robust earnings revisions and continued leadership in AI-driven growth. Europe ex-UK and Emerging Markets were both kept at a “neutral” rating.

Market Outlook and Targets

Citi's global outlook is underpinned by strong earnings expectations, with its forecast for global EPS growth having risen by 10 percentage points year-to-date to 27%. The bank has set the following year-end 2026 targets:

• MSCI AC World Index: 1,440 (approx. 6% upside)
• S&P 500: 8,100 (approx. 7% upside)
• Japan's TOPIX: 4,500 (approx. 12% upside)

Within the UK, the report indicated a preference for the FTSE 100 over the more domestically focused FTSE 250, given ongoing economic uncertainty. The bank continues to favor the Banks, Basic Resources, and Health Care sectors in the UK market.