Investing.com - The economic outlook for the UK looks difficult, but Berenberg sees a low hurdle for the equity markets to return reasonable returns this year.
In 2024, UK equities returned around 10%, said analysts at Berenberg, in a note dated Jan. 17, but the German bank expects a year of soft growth and firm inflation ahead, likely limiting rate cuts to 50 bps with the UK remaining in a higher-for-longer pattern.
Political risk appears to have returned to the UK, the bank added, with significant moves in UK financial assets sending a warning shot across the UK government’s bow.
That said, despite these factors, overall, UK shares look cheap on a 10.7x 12-month forward P/E, Berenberg said, continuing to trade at a deep discount to both global equities and their own history at c10.7x.
“To us, this suggests that the hurdle to reasonable returns from UK shares this year is low. A combination of 5% earnings growth and a ‘bear market’ 12-month forward P/E in one year’s time would support 10-15% returns in 2025. This is our base case for the coming year,” Berenberg added.
Our brave new world regime thesis has guided us to focus on three allocation skews over the last two to three years: balance, valuation and active hedging.
We take these skews into all of our allocation strategies. For example, balance and active hedging support our asset allocation barbell combining equities with gold, cash and Bitcoin; we have 80% exposure across these two legs in 2025, 10% higher than through last year.
“Within equity markets, we continue to favour systematic momentum strategies in the UK: EPS, DPS, DY*G, buybacks. Additionally, we overlay quality at a reasonable price factors to these strategies in order to optimise exposure to our brave new world skews,” Berenberg added.