UBS Upgrades UK Equities to 'Attractive' on Energy Price Surge and Valuation

UBS has upgraded its outlook on UK equities to "attractive" following a recent market pullback, citing upside potential for corporate earnings driven by a surge in energy prices. The investment bank raised its price targets for the FTSE 100 index but maintained a cautious stance on the region's relative performance compared to global peers.

Earnings Boost from Commodities

The upgrade is primarily based on the positive impact of rising energy prices, which UBS estimates will generate around 18% of the MSCI UK index's earnings this year. According to the bank, this commodity strength had already prompted it to raise its 2026 earnings growth forecast for UK companies to 16% in August, up from an earlier estimate of 11%. With energy prices climbing further since then, UBS noted that risks to its earnings estimates are now skewed to the upside.

On valuation, UBS pointed out that UK equities trade at a forward price-to-earnings ratio of 12.4 times, slightly below the median of 12.8 times recorded since 1990. In light of the improved earnings backdrop, the bank set a new FTSE 100 target of 11,200 for December 2026 and 11,500 for June 2027.

Scenarios and Risks

While higher interest rates remain a near-term risk to valuations, UBS believes the UK market's high exposure to commodities means earnings growth can more than offset the effect of higher discount rates. The bank outlined several potential scenarios for the market:

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• Upside Scenario: The FTSE 100 could reach 12,300 by June 2027 if global growth accelerates, commodity prices rise further, or sterling weakens.
• Downside Scenario: The index could fall to 7,700 by June 2027 in the event of extended energy disruption in the Middle East, a resurgence of trade wars, or sharply higher bond yields.

A Cautious Preference

Despite the upgrade, UBS clarified its position, rating UK equities as "Attractive" on an absolute basis but "Least Preferred" relative to other global equity regions. The bank stated its preference for the Eurozone, which it believes is better exposed to broader cyclical improvement.

UBS forecasts that UK earnings growth will slow to around 9% in 2027 as the tailwind from commodity prices fades. Matthew Gilman, Head of CIO Europe Equity Strategy at UBS, noted that growth opportunities in the UK are better accessed through individual stock selection rather than broad market exposure, which helps explain the market's narrow leadership over the past 12 to 18 months.