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UK Stocks Remain Cheap After Election – Citi

London, July 5, 2024 — The recent U.K. general election has resulted in a landslide victory for the opposition Labour Party, and Citigroup sees potential for an upside in U.K. markets following this outcome.

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As of 05:20 ET (09:20 GMT), Labour, led by Keir Starmer, secured 412 of the 650 seats in parliament, ending 14 years of often turbulent Conservative government with a significant majority.

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Citi analysts suggest that Labour’s policies are expected to be relatively business-friendly. In a note, they stated, “Historically, the U.K. market tends to be flat on average six months after Labour elections, but meaningfully higher one year later. On a relative basis, the U.K. market has tended to underperform one to two months after Labour wins, while showing decent relative performance 12 months post-election. The domestically oriented FTSE 250 has typically outperformed the FTSE 100 following Labour victories.”

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Despite the broad market being considered cheap, Citi noted that U.K. EPS growth is expected to lag behind peers in both 2024 and 2025. “Ultimately, we target a 7% (8700) upside for the FTSE 100 by mid-2025 based on continued EPS growth and mild multiple expansion,” analysts at the U.S. bank said.

Citi expressed a preference for the FTSE 250 over the FTSE 100, citing an improving balance of risks for U.K. small and mid-cap stocks (SMID caps), which have underperformed but are expected to see superior EPS growth compared to large caps. SMID caps are also seen as better positioned to benefit from rate cuts and an increase in deal-making. Within the U.K. SMID universe, Citi screens for stocks with domestic exposure that have de-rated year-to-date despite solid fundamentals.

The bank forecasts FTSE 100 EPS growth of +3% in 2024 and +6% in 2025, aligning broadly with consensus. Despite last year’s EPS recession, analyst forecasts up to the end of 2025 do not see U.K. EPS recovering to its 2022 peak. “Our models suggest the U.K. equity market is pricing in more optimistic +15% EPS growth over the next 12 months, though upside remains possible if earnings deliver,” Citi noted.

UBS also commented, highlighting that a stronger pound favors the FTSE 250 over the FTSE 100, as around 75% of FTSE 100 revenues come from outside the U.K., compared to less than 50% for the FTSE 250. They noted that domestic-focused sectors include Real Estate and Utilities, while Materials and Health Care are more international.

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