Investing.com -- UBS upgraded US and UK stock markets, while downgrading Europe, the firm revealed in a Tuesday note.
The bank lifted UK equities to Overweight, a move based on the sector-adjusted price-to-earnings (P/E) ratio relative to the MSCI AC World, which is currently at a 25% discount.
UBS notes that UK markets are defensive in nature and could benefit from a stronger dollar. The firm's above-consensus GDP growth forecast for the UK, coupled with a lower-than-consensus interest rates projection, also supports its positive outlook.
In addition, the market also has “less ‘Trump’ risk on our scorecard than any major non-US Market,” UBS strategists led by Andrew Garthwaite said.
Sector-wise, the investment bank highlights domestic sectors such as retailing, UK banks, homebuilders, and brick manufacturers as particularly attractive, as well as “many cheap stocks versus peers and have underperformed their peers.” These include Relx PLC ADR (NYSE:RELX), Experian PLC (LON:EXPN), Smith & Nephew SNATS Inc (NYSE:SNN), and Imperial Brands PLC (LON:IMB), among others.
In the case of US equities, UBS points to a number of reasons for the upgrade. The US is seen as a favorable destination when global growth slows, given its low operational leverage, flexible labor market, and the Federal Reserve's dual mandate.
The firm also acknowledges potential policy changes that could benefit the US under the Trump administration. However, UBS stops short of an Overweight rating, noting that a lot of the 'Trump hope' is already priced in, and that valuations are at new highs relative to global markets.
Further concerns about the US include a forecasted slowdown in GDP growth and the implications of a strong dollar on earnings revisions.
Despite downgrading Europe to Benchmark status, UBS advises against underweighting European equities.
The downgrade is attributed to poor relative earnings and economic momentum. However, UBS points out that the sector-adjusted P/E ratio for Europe compared to the US is at a significant discount, and there are expectations for the gap in GDP growth between the US and Europe to narrow.
The European Central Bank's anticipated rate cuts and the potential impact of a weaker Euro on earnings growth are also mentioned as possible catalysts. Furthermore, UBS believes that Europe's fiscal position “is not reflected at all in valuations.”
The firm remains cautious on China but notes potential near-term improvements in Chinese lead indicators.