UK equities are deeply out of favour but offer the most attractive valuations among G10 markets, according to a new report from UBS, which argues the structural headwinds facing London-listed stocks have been more than priced in.
The bank's HOLT research team acknowledges the challenges facing the market: fewer listed companies with durable competitive advantages than at any point since 2009, limited exposure to the artificial intelligence theme, persistently higher inflation expectations than peers, and fiscal uncertainty weighing on sentiment.
The aggregate UK market cap has fallen from around a quarter of Europe's total in 2002 to roughly 10% in recent years, a decline that has been most pronounced in the financials sector, which accounts for 29% of UK aggregate cash flow return on investment.
Despite all that, UBS argues it is too soon to write off UK stocks.
Financials, the largest contributor to UK economic returns, are trading at a 30-year valuation discount to European peers, a level the bank describes as excessive given that UK real bond yields are lower than those in the US, France and Italy, suggesting the market is pricing in inflation risk rather than fiscal credibility concerns.
With technology stocks contributing less than 1% of aggregate UK cash flow returns, the market also functions as a natural hedge for investors overweight global tech.
UK companies that have survived the prolonged de-rating tend to be higher quality than their European equivalents, with median cash flow returns above European peers in most sectors outside healthcare and utilities.
UBS screens 33 large-cap UK exporters as attractively priced relative to their ten-year history, with improving earnings momentum.
