New forecast: when the FTSE 100 will hit 8,000

We’re told UK shares are cheap, but when will they catch up with overseas peers? Analysis by this highly regarded expert gives some clues.

The buy British message to investors continued to be heard today when banking giant UBS backed the FTSE 100 index to finish next year at a record 8,000.

The City firm's base case estimate points to a potential 10% upside from today's level, increasing to 20% higher at 8,800 under its most optimistic scenario.

Its “overweight” position on the London market is not quite so clear cut, however, as UBS is no longer a fan of domestically exposed stocks due to the Bank of England being as much as two years ahead of other major central banks in its rate hiking cycle.

• Invest with ii: Top UK Shares | Share Tips & Ideas | Open a Trading Account

For the FTSE 100, this is less of an issue given 77% of revenues come from overseas, while for UK lenders the prospect of higher rates will support net interest margins.

• Get £100 cashback when you switch to an ii ISA in November. Terms apply
• Read more of our content on UK shares here
• The Chart Show: GBP, IAG, Uber

The bank expects European stock market returns to be front-loaded in 2022, with the second half of the year likely to be tougher as earnings momentum and GDP growth fades and the market focus switches to central bank rate hikes.

UBS base case for the UK is built on above consensus earnings per share growth of 7% in 2022, slowing to 2% in 2023. Assuming the price/earnings multiple moves to the 10-year average of 13 times, this points to an approximate 10% upside for the FTSE 100 index.

The most optimistic scenario of 8,800 is based on 10% EPS growth in 2022 and 5% in 2023 and is likely to reflect upside risks such as an accelerated economic recovery and a more modest deceleration of fiscal support.

The most likely downside risks are considered to be inflation proving to be more structural than transitory, new Covid variants potentially being more resistant to vaccines and corporate pricing power finally starting to fade.

Under its gloomier scenario, UBS has a downside estimate of 6,500 based on a 4% fall in EPS next year and no change in 2023.

As well as being “overweight” on the UK, UBS has the same stance on Italy and Germany after targeting an 8% upside for Europe's Stoxx 600 index to 520 by the year end.

Wall Street's JP Morgan told clients yesterday that it is now backing British stocks after a long period of underperformance triggered by the Brexit vote in 2016.

Its upgrade from “neutral” partly reflects the struggle to find value elsewhere after a surge for global equities since Pfizer (NYSE:PFE) said its Covid vaccine had an efficacy rate of over 90% in trials.

• Jeff Prestridge: 25 good reasons to buy the UK stock market
• Two UK climate change shares I am backing
• ii COP26 hub: see tips, news, comment and analysis from our experts

The S&P 500 and other Wall Street indices continue to set record highs, fuelled by expectations that the era of cheap money will last for some time yet.

On today's anniversary of Pfizer day, Deutsche Bank has looked at a selection of total returns across global assets since the session before the drug giant's announcement.

The FTSE 100 index ranks 13th in the 30-strong list, behind the Nasdaq, S&P 500 and Stoxx 600. West Texas oil leads the way with a rise of 120%, with US and European financials next.

While commodities have generally outperformed over the last 12 months, gold and silver were at the bottom of the pack as the flight to quality trade unwound. Most global bond markets have also seen a negative return.

Bitcoin isn’t covered on the list, but Deutsche Bank notes it has returned 325% over the period. The potential of the cryptocurrency as an inflation hedge today meant the price stood above $68,000 for the first time.