UK Stocks Set Stage for Comeback

British stocks are expected to encounter a new environment in the new year, offering some underperformers a chance to shine.​

Picking Winners From The Ruins

UK stocks advanced throughout the year, with technology and financials leading the charge as the AI boom reached British shores and investors realised the undervaluation in the UK banks. However, certain sectors, like housing, lagged behind after the BOE maintained higher rates for longer than initially expected. The underperformance has positioned British homebuilders among a set of companies with attractive valuations that could finally catch up to broader market gains.

The focus on homebuilders dovetails with positive forecasts for domestic stocks, thanks to expectations of BOE rate cuts through 2025 and increased government spending to prop up economic activity. The government plans to bolster the housing market through targeted support. Additionally, a stronger pound due to other central banks cutting rates faster than the BOE could help contain stubborn UK inflation and boost British consumer purchasing power, potentially benefiting retail stocks.

From Setbacks to Comebacks

All British housing names struggled across the board, with Barratt Redrow posting the steepest decline among major players. The merger between the two companies faced investor scrutiny due to integration hurdles and regulatory challenges. However, they have started to abate following legal completion earlier this year, with analysts forecasting a rebound driven by broader market improvements and catching up from earlier losses.

In the entire FTSE 100, JD Sports Fashion emerged as the worst performer, tumbling 41% and trading at a P/E ratio below 14x. Investor confidence deteriorated following disappointing sales growth, though the company attributes this to temporary factors, including weather conditions and shifts in Nike's sales strategy. However, JD continues its US expansion efforts, targeting a more resilient consumer base. A potential economic recovery in the UK could provide additional tailwinds for consumer brands like JD.

JD Sports Bottoming Out?

JD Sports currently trades near critical support below the 100 GBX handle, forming a broadening wedge pattern since February 2023. At an alarming distance from the bottom of 89 GBX, chances of a turnaround are increased due to a potential double-bottom formation. If the bulls reclaim the triple digits and fill the gap to 112 GBX, taking over the 125 GBX swing would open the door to 162 GBX next. Conversely, a break below the swing low would suggest bearish control, with a leg down extending losses to 80 and 75 GBX.

Source: SpreadEx / JD Sports Fashion

Key Takeaways

Some UK underperformers carry good prospects into 2025 as the BOE is expected to ease monetary policy, with consumer-focused stocks likely to benefit from improved spending power and economic conditions. The combination of attractive stock valuations at a time of monetary easing could mark a turning point for the worst performers of 2024, though sustained recovery requires broader market support and improved consumer confidence.