UBS Equities-European Equity Strategy _Simply UK Regime Shifts, but Valu...-118355636

ab21 October 2025Global ResearchEuropean Equity StrategySimply UK: Regime Shifts, but Value Still GripsEquities move based on Regime, Earnings, Valuations, and Sentiment (REVS)UK equities are navigating a soft patch, but resilient consumption and attractive valuations, especially in SMIDs, set the stage for a 2026 earnings rebound, with selective opportunities emerging as sentiment turns. Focus should be on quality, domestic exposure, and income resilience as the market transitions towards recovery.Regime: Navigating the Soft Patch, Positioning for RecoveryThe UK macro regime is in a soft patch as growth momentum slows after a robust H1. August GDP eked out a 0.1% rise, with services steady and industrials providing a modest lift. The BoE is expected to hold rates at 4% until at least February 2026, with inflation peaking at 4% in September but expected to moderate into 2026. Policy uncertainty lingers ahead of the Autumn Budget, and global trade frictions remain a headwind. Yet, household consumption is resilient, underpinned by high savings. The FTSE 100 and FTSE 250 have both slipped into slowdown territory on PMI new orders, but remain resilient, and SMIDs are poised for a domestic recovery.Earnings: Mixed Momentum, but 2026 Rebound in SightUK large and SMID-caps are expected to deliver higher 2025 earnings growth than Europe, but the outlook is nuanced. 2025 EPS growth hopes have faded in most sectors, with only a handful showing signs of life. The real story is the anticipated earnings rebound in 2026, as the drag from net exports fades and domestic demand stabilises. Earnings momentum is mixed across sectors, but the UK still outpaces continental peers on forward growth expectations.Valuations: Still on Sale, Especially for Quality and SMIDsUK equities remain deeply discounted versus Europe, both on forward PE and PB multiples. High-quality stocks are also trading at a discount, and UK SMIDs are particularly cheap. The FTSE 250 offers cleaner macro exposure and more leverage to a domestic recovery than the globally heavy FTSE 100. Though the market may be pricing in caution, we believe it's creating opportunities for those willing to look through the cycle.Sentiment: Flows Still Cautious, but Selective Opportunities EmergeSentiment remains cautious, with outflows from both large and SMID cap equity funds. Large-cap crowding is long in industrials, IT, and energy, while real estate is heavily shorted. For SMIDs, there’s selective crowding in materials, financials, and communication services, but shorts in consumer discretionary and healthcare. The market is sensitive to data surprises and policy signals, but the return of local leadership in sentiment and performance is a key theme.Key Trade IdeasAs UK macro stabilises, we see the return of local leadership in sentiment and performance. We're leaning into UK names that benefit from rate cuts and resilient local growth. Our trade ideas play three themes:
FTSE 250 vs. FTSE 100: Small Cap, Bi