An analyst’s FTSE 100 forecast for 2025
There’s little doubt that the UK’s blue-chip index is undervalued compared with overseas peers, but this analyst has concerns. Graeme Evans explains.
26th November 2024 14:10
by Graeme Evans from interactive investor
A year ahead forecast for the FTSE 100 index has warned that US headwinds and a slow earnings recovery may limit the top flight’s scope for a re-rating in 2025.
UBS Global Wealth Management has a Neutral stance on UK equities, having been its most preferred region earlier this year. It sees the FTSE 100 only slightly higher at about 8,200, with its year-end upside and downside projections at 9,800 and 6,600 respectively.
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The bank said: “The underlying macroeconomic backdrop remains supportive with domestic growth gradually accelerating, and the Bank of England has started to cut interest rates.
“But the earnings recovery is likely to be slow, and a Trump presidency raises risks to growth from tariffs as well as headwinds to valuations from higher US bond yields.”
The cautious outlook comes with the FTSE 100 index trading on a price/earnings (PE) multiple of 11.4 times, well short of the long-run average of 12.8 times since 1987.
However, UBS said UK equity valuations are not as attractive as they first appear given the reliance on financials and energy at 8.4x and 8.1x respectively. It pointed out earnings in these sectors could be at risk from weak oil and gas prices as well as falling interest rates.
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In the uncertain economic outlook, it said investors searching for growth may continue to focus on structural themes, such as AI, to which the UK equity market has limited exposure.
It told clients this week: “We advise broad-based exposure to the UK, with a tilt toward our European sector preferences (IT, consumer staples, and utilities).
“Although the UK offers few investment opportunities in IT, we see more opportunities in consumer staples and utilities, both of which offer attractive relative value and are well positioned to benefit from falling inflation and lower interest rates, in our view.”
After an 11% fall in corporate profits last year, the bank sees the recovery in earnings taking longer after forecasting a further 3% decline this year before 5% growth in 2025. That compares with no change and 7% growth forecast previously.
It said: “This is in part due to softer commodity prices, disappointing sales to China, and risks to global growth from higher trade tariffs, which are possible under the new US administration.”
The Swiss bank’s upside scenario shows the FTSE 100 finishing 2025 at 9,800, an outcome dependent on higher commodity prices, better global growth and weaker sterling. Commodity sectors contribute around 25% of FTSE 100 earnings.
In the most pessimistic scenario warning of a retreat towards 6,600, the bank said that persistently high inflation could keep Bank of England rates higher for longer and put downward pressure on equity valuations and the economic growth outlook.
Limited exposure to the technology sector has played a role in the recent FTSE 100 underperformance, along with slow domestic economic growth, high interest rates and political instability since Brexit.
The bank noted in the summer that £100 invested in the FTSE 100 ten years ago would have been worth £177, taking into account both share price moves and dividends.
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This materially lagged the EuroStoxx 50, Japan's TOPIX and the S&P 500 index, which would have seen that £100 grow to £228, £243 and £455 respectively.
UBS is more optimistic on the FTSE 250 index, having said last week the benchmark is well positioned to benefit from the UK's targeted growth in domestic spending, infrastructure and innovation.
It added that Europe’s most-domestically aligned major index offered a degree of insulation from currency and trade risks in the wake of Donald Trump’s election.
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