FTSE 100 to hit 7,700 by year-end, GBP/USD to tank toward 1.15 – UBS

UK equities have held up well. The FTSE 100 index is up 1.5% year to date, outperforming other major markets. Economists at UBS see reasons why UK equities can continue to do well.

The drivers of the FTSE 100 are more international

“FTSE 100 companies generate around 75% of their revenues outside the UK, which means the market is less sensitive to domestic growth concerns. While risks to global growth have risen, incoming data – strong US jobs growth, higher US ISM services, robust China export growth – suggest global activity, though slower, is still holding up.”

High exposure to value, commodity, and defensive sectors

“Value sectors such as energy, basic resources, and financials – accounting for c. 40% of the index – have benefited from higher interest rates and commodity prices. In addition, domestic growth concerns have led to strong performance of the defensive healthcare sector, which has c. 14% weight.”

Strong earnings and attractive valuations

“We expect the UK to deliver one of the highest earnings growth rates, of 12%, this year. A weaker GBP can also provide a further boost to earnings as three-quarters of sales are overseas with a large share in US dollars. Amid the threat of an energy supply shortage this winter and weak economic growth, we expect GBP/USD to fall to 1.15 by end-2022. From a valuation perspective, the FTSE 100 trades on a 12-month forward P/E of 10.2x, an attractive 34% discount to the MSCI AC World index.”

“We continue to rate the UK as most preferred and see a modest 4% upside, targeting the FTSE 100 at 7,700, by end-2022.”