Citi downgrades UK stocks to 'underweight'

Citi has downgraded its average rating for UK stocks to 'underweight', saying the region's heavy exposure to oil could lead to a raft of earnings downgrades in the near future.

"The UK economy is approaching an inflection point, with tailwinds from supportive fiscal policy and better-than-expected trade outturns running their course," said analyst Beata Manthey.

"Headwinds associated with tighter monetary policy are now building momentum, with unemployment increasing."

Manthey said that a recession is on the horizon for the first quarter of 2024, while the Bank of England will likely begin to loosen monetary policy in mid-2024.

Earnings across the UK have been "under pressure" in 2023 after a strong 2022, with the fall in oil prices in the first half acting as a key headwind.

Overall, analysts on average expect earnings per share across UK-listed stocks to fall by 6% this year, before bouncing back 5% next year.

However, while the consensus for oil prices is around $85 a barrel – similar to current levels – Citi themselves expect a drop to around $70.

Manthey said: "This poses a risk of EPS downgrades. We also worry that the UK’s 50% defensive exposure could weigh on performance. We therefore downgrade to 'underweight'.

"We do however like UK miners given discount valuations and potential upside from China."