UK stocks downgraded by Citi but ‘cheap’ FTSE 100 seen rising

UK equities were downgraded by Citigroup (NYSE:C) in its quarterly strategy update, though the benchmark FTSE 100 index is seen as “cheap” and forecast to rise by the middle of next year.

The bank said the economy is “approaching an inflection point, with tailwinds from supportive fiscal policy and better-than-expected trade outturns running their course” but headwinds associated with tighter monetary policy “now building momentum, with unemployment increasing”.

This suggests a recession beginning in the first quarter of 2024, leading to Bank of England rate cuts in mid-24.

With UK earnings under pressure this year after a strong 2022 and a fall in oil prices serving as a first-half headwind, the City analyst consensus forecasts point to a 6% fall in UK EPS this year, before rising by 5% in 2024.

“The FTSE 100 index is the cheapest amongst the major regions,” said Citi, noting the 12-month forward PE of 10x, below Continental Europe and even emerging markets.

With an attractive combination of high dividend yield (4%) and free cash flow yield (7%), Citi’s target for the FTSE 100 is to hit 8200 by mid-2024, implying 11% upside.

Going forward, with Citi seeing oil retreating, they noted this poses a risk of EPS downgrades for big oilers.

“We also worry that the UK’s 50% defensive exposure could weigh on performance. We therefore downgrade to ‘underweight’.”

However, Citi expressed a liking for UK miners, given “discount valuations and potential upside from China”.