HSBC strategists have upgraded the UK market to Overweight from Neutral, highlighting four key reasons behind the move.
Firstly, the FTSE 350 index, which tracks the combined performance of the 350 largest companies listed on the London Stock Exchange (LSE), is trading at a discount relative to its own history and other markets. Moreover, mergers and acquisitions (M&A) could become a stronger catalyst, with total transaction values expected to surpass last year’s figures, the bank notes.
Secondly, higher commodity prices, rising bond yields, and the strength of the USD are also positive tailwinds for performance.
Thirdly, the combined dividend and buyback yield of the UK market significantly exceeds that of other markets, HSBC pointed out. Finally, the long-term structural pressure from UK pension fund selling is over, as these funds have largely depleted their UK equity holdings.
Citing their above-consensus earnings per share (EPS) growth forecasts and recent adjustments to HSBC economists’ industrial production projections, strategists lifted the year-end index target for the FTSE 100 to 8,750 from 8,100, implying a 4% upside from current levels.
However, the investment bank outlined several potential risks to this outlook. For instance, EPS growth in the UK continues to lag behind that of the FTSE Europe ex-UK index. Despite this, HSBC’s EPS growth forecast for the year is higher than consensus estimates, and the Q1 results season has shown a higher level of EPS beats compared to other major European markets, signaling the potential for consensus upgrades.
“Other risks include the fact that current tailwinds in the form of commodity prices, bond yields and exchange rates could turn into headwinds in future while outflows continue for domestic funds, though global fund weightings have improved lately,” they added.