Citi Research has changed its tactical stance on the UK equity market, downgrading its recommendation to "underweight" from "overweight." The bank’s strategists said the market’s heavy exposure to defensive names and commodities now looks less advantageous given a widening in earnings growth and market leadership elsewhere.
In its assessment, Citi noted that the UK had functioned as a geopolitical hedge for equity allocations during heightened tensions tied to the Iran conflict. As those geopolitical pressures have eased, the protective rationale for a UK overweight has diminished.
Although Citi acknowledges that valuations in the UK remain attractive, the strategists argued that the composition of the market - with its defensive skew and significant commodity exposure - reduces its appeal in the current environment, where cyclical opportunities are gaining ground. The firm said it continues to favour cyclical markets over defensive ones.
The FTSE 100 is cited at 12.2 times forward earnings, a figure the report places at the 43rd percentile of its historical valuation range. Citi describes the UK as the cheapest of the major markets on a relative basis.
On earnings projections, Citi expects FTSE 100 earnings per share to rise by 22% in 2026, a forecast that aligns with consensus. For 2027, Citi is projecting 9% EPS growth for the FTSE 100, which is above the consensus estimate of 7%.
Within the UK, the bank still expresses preference for specific sectors: Banks, Basic Resources and Health Care. Given prevailing economic uncertainty, Citi indicated a preference for exposure to the FTSE 100 rather than the FTSE 250.
The re-rating of the UK is part of a broader repositioning by Citi toward more cyclical markets and away from defensive sectors. As part of the same review, the strategist team upgraded Japan to "overweight" from "underweight." The report identifies Japan as "one of the most attractive beneficiaries of improving cyclical conditions," highlighting its exposure to the artificial intelligence investment cycle through technology and semiconductor supply chains.
Citi set a TOPIX target of 4,500, implying about 12% upside from the current level of 4,020 cited in the report.
The U.S. market remains rated "overweight," supported by what Citi describes as robust earnings revisions, strong earnings delivery, and continued leadership tied to AI-driven growth. The bank’s S&P 500 year-end target is 8,100, implying roughly 7% upside from the level of 7,544 referenced in the report.
Regionally, Citi left Europe ex-UK at Neutral, calling it an attractive diversifier against potential AI-driven volatility, while Emerging Markets remain Neutral as well.
At the sector level, Citi upgraded Financials to "overweight" from "neutral," kept Information Technology and Materials at "overweight," and downgraded Health Care to "neutral" from "overweight." Communication Services and Consumer Staples were left at "underweight."
For global equities, Citi established a year-end 2026 target of 1,440 for the MSCI AC World Index, which implies roughly 6% upside from the 1,353 level noted in the report. The firm attributes this to what it calls "robust EPS growth." Citi also reported that global EPS growth expectations have increased by approximately 10 percentage points year-to-date to 27%.
Note: This article summarizes Citi Research's published positioning and forecasts as presented in the report.