UBS has predicted a significant turning point for UK and European stocks by 2026. The investment bank’s analysis highlights a potential return to earnings growth in the region after three years of stagnation. The optimism stems from improved valuations and positive market sentiment.
Key Insights and Stock Recommendations
The performance of major indices like the FTSE 100 and DAX suggests that investors are beginning to recognize the potential in European equities. UBS expects an average 7% rise in earnings per share for European stocks, although broader analyst forecasts hover around 10-11%.
Highlighted Stocks for Investors
- Aviva PLC (LSE:AV): Valued at 11 times 2026 earnings with a yield of 5.5%, Aviva shows strong cash flows.
- Admiral Group PLC (LSE:ADM): Slightly more expensive at 13 times earnings, but offering an attractive 7.3% yield.
- M&G PLC: Trading at just 9 times next year’s earnings, yielding 7.5%, making it one of the more affordable options.
In the banking sector, NatWest Group PLC (LSE:NWG) also appears as a preferred choice. UBS views European banks favorably due to expected loan growth and effective cost management. Additionally, stocks such as RELX PLC (LSE:REL) and Sage Group PLC (LSE:SGE) are positioned well to benefit from advances in AI technology.
The Case for European Equities
Analysts at UBS believe that European equities are poised for growth driven by several factors:
- Accelerating domestic growth in the region.
- Robust fiscal expansion supporting economic activity.
- Structural investments enhancing productivity and operational efficiency.
These elements are seen as catalysts for a positive shift in the European market landscape by 2026.
Areas to Approach with Caution
UBS advises caution in certain sectors such as the automotive, chemicals, and household goods industries. Challenges include:
- Inventory overhang affecting autos.
- Margin pressure in the chemicals sector.
- Rising costs in household goods, notably with companies like Unilever PLC (LSE:ULVR). While strong, analysts are skeptical about Unilever’s margin targets amidst changing consumer behaviors.
While the defense sector remains an area of interest due to ongoing security spending, UBS warns of elevated valuations leading to crowded positioning. This could pose risks as earnings revisions become less predictable.
Conclusion
As UBS predicts a critical turning point for UK and European stocks by 2026, investors are encouraged to focus on resilient sectors with strong fundamentals. The shift toward a new era of growth in Europe may provide rewarding opportunities for those willing to adapt their strategies.
