UK Stocks Reveal Promise as Year Ends

UK equities present a mixed picture heading into the festive period, but certain sectors might outperform next year.

Varied Results, Uneven Outlook

The FTSE 100 has posted a 6% gain this year, while the domestically focused FTSE 250 lags behind at 4%. The bulk of gains materialised in Q1 as the UK bounced back from a technical recession in the latter half of 2023.

Trading activity has remained lacklustre since then as the BOE maintained higher rates to counter potential inflationary effects from the Budget. This has coincided with a 13% uptick in company insolvencies in the UK, casting a shadow over certain sectors heading into 2025, with some themes likely to repeat while others could change.

The technology and communications sectors outperformed on the back of higher margins, while miners and energy stocks slid lower, dragged down by sluggish Chinese demand and weaker crude prices. In contrast, the property sector disappointed investors who had positioned for rate cuts by the BOE as persistent inflation left the bank holding rates, hurting property developers.

Sectoral Opportunities in UK

Market analysts maintain an optimistic outlook, expecting a 16.8% average increase in UK stocks throughout 2025. The housing sector could stage a comeback as the BOE might cut rates up to four times over the next year, lowering mortgage costs. Strong employment figures may further support consumer confidence in buying homes, with current prices appearing quite attractive following recent declines.

British manufacturing may emerge as a potential winner or lower monetary policy, having outpaced continental PMIs despite headwinds stemming from Brexit. Lower borrowing costs could, in fact, stimulate capital investment, while Budget allocations toward digital technology and decarbonisation may provide additional tailwinds. On a different note, the possibility of increased US tariffs could redirect trade flows, particularly benefiting Rolls-Royce's aerospace division through higher engine exports across the Channel.

RR Near Midway to Records

Rolls-Royce has established a solid uptrend since bottoming out at 65 GBX in October 2022, facing midway resistance at the 50% Fibonacci retracement of the 1100-65 GBX leg near the 600 GBX barrier. Above the psychological 500 GBX level, price action suggests strong momentum while trading past the swing low of 520 GBX. However, the stock faces immediate resistance at the 61.80% Fibonacci retracement at 710 GBX, with a move higher opening the door to 860 GBX. Meanwhile, support below the major round level at 500 GBX remains at the 38.2% Fibonacci retracement of 460 GBX, offering bears the potential for extended declines towards the 400 GBX handle.

Source: SpreadEx / Rolls-Royce Holdings

Key Takeaways

The UK market heads into 2025 with select sectors poised for outperformance against others that may underperform, with particular optimism surrounding the housing and manufacturing sectors. Rolls-Royce stands out as a prime beneficiary of potential trade redirections and manufacturing resilience as the Trump administration is poised to reveal new tariffs. While broader market sentiment remains cautious, sector-specific opportunities offer promising entry points as the BOE is expected to lower its interest rates.