The UK blue-chip rally is expected to slow relative to global peers

After their strong start to 2022, British large cap stocks may be about to lose steam.

Analyst price targets for the coming year suggest that the FTSE 1000 index has among the lowest return potentials of major global indices, according to data collected by Bloomberg. Benchmark’s 12-month implied upside of 19% – calculated by aggregating the average price targets for index components – compares with 29% for the Euro Stoxx 50 and 21% for the S&P 500.

The FTSE 100 has risen 0.6% this year against a 12% drop for the Euro Stoxx 50 due to its abundance of lively commodity stocks and high exposure to defensive stocks and value stocks such as banks. This outperformance has eroded the expected upside, while a easing in commodity prices could weigh on energy and mining stocks.

A Bloomberg survey of strategists published last week indicated only 0.8% upside for the UK benchmark at the end of the year, against 8.1% for the Euro Stoxx 50. The top-down view of index targets is typically much lower than that overall price targets where analysts rate individual stocks.

UK blue-chip stocks are still considered cheap after years of weak returns relative to global peers.

“The undervaluation was in decades of extremes, and the overpayment has been relatively subdued so far,” said Ian Lance, who manages more than £ 3 billion ($ 3.8 billion) as co-head of the UK Value & Income team at Redwheel. Still, some sectors, such as consumer goods, look “very expensive,” Lance said via email.

Although rising inflation and interest rates in the UK may hinder consumer demand, the FTSE 100 is somewhat shielded from the domestic economy as the majority of sales come from abroad. Still, the price target data indicates that UK midcaps have greater potential for gains, with the FTSE 250 index offering 28% upside, the same as the Nasdaq 100 index.

© 2022 Bloomberg LP

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