NIESR Upgrades UK 2026 Growth to 1.4%: Equity Investment Strategy

Based on my comprehensive research, I can provide you with a detailed analysis of NIESR’s upward revision of UK growth to 1.4% for 2026, the sectors likely to drive this outperformance, and strategic recommendations for global portfolio positioning.

---

The National Institute of Economic and Social Research (NIESR) has revised its UK GDP growth forecast for 2026 from 1.2% to 1.4%, reflecting improving domestic economic momentum and a more favorable macroeconomic environment [1]. This revision positions the UK as a relative outperformer among advanced economies, particularly when compared to the United States, where growth is expected to decelerate from 2.8% in 2024 to 1.7% in 2026 [1]. The Institute for Fiscal Studies corroborates this outlook, projecting average annual real GDP growth of 1.4% from 2026 onwards, driven by strengthening consumption and investment [2].

The improved growth outlook is predicated on several converging factors:

1. Monetary Policy Relief
   : The Bank of England’s anticipated rate-cutting cycle is expected to provide significant stimulus to interest-sensitive sectors, including consumer spending, housing, and business investment.
2. Break in the “Gilt Doom Loop”
   : Lower government bond yields reduce refinancing pressures and improve sentiment toward UK assets.
3. Improving Earnings Outlook
   : Corporate profitability is expected to accelerate over the next 12 months, particularly for domestically focused businesses [3].
4. Weak Pound Sterling
   : The currency’s depreciation has enhanced competitiveness for UK exporters and boosted overseas-earnings translation for multinational corporations.

---

Based on sector analysis and investment research from major UK-focused asset managers, the following sectors are positioned to capitalize on the improved economic backdrop:

The banking sector represents one of the most compelling structural and cyclical opportunities within UK equities. Major UK banks including Lloyds Banking Group, NatWest, Barclays, and HSBC have demonstrated resilient earnings momentum and benefit from:

• Strong net interest margin performance
• Improving loan demand as rates normalize
• Robust regulatory capital positions
• Attractive dividend yields (FTSE 100 banking stocks offer yields averaging 3-4%)

According to sector analysis from Discovery Alert, active sector rotation has favored financial services stocks during recent market sessions, reflecting investor confidence in the UK banking sector’s leadership [4].

UK industrials are expected to benefit directly from the anticipated pickup in economic activity and infrastructure investment. Key beneficiaries include:

• Aerospace & Defense: Companies like BAE Systems and Rolls-Royce continue to benefit from elevated defense spending globally
• Engineering & Manufacturing: Businesses with exposure to goods production and supply chain optimization
• Industrial Equipment: Firms providing automation and productivity solutions

The sector’s international orientation provides diversification benefits while domestic exposure positions it to capture the improving UK growth trajectory.

The FTSE 100’s significant commodity weighting (approximately 25% of index earnings) positions it to benefit from the commodity supercycle narrative gaining traction in 2026. Mining giants Glencore and Rio Tinto are leading the charge, with the sector benefiting from:

• Constrained supply growth across key commodities
• Strong industrial demand from infrastructure and energy transition initiatives
• Investment demand as a hedge against macroeconomic uncertainty [5]

UK utilities represent a compelling combination of defensive characteristics and structural growth drivers:

• Attractive valuations relative to historical norms
• Low capital intensity with stable, inflation-linked cash flows
• Critical infrastructure investment requirements (energy transition, water networks)
• Supportive regulatory frameworks

According to Interactive Investor’s analysis, utilities are highlighted as “structural and cyclical beneficiaries” of the improving UK growth outlook [3].

The healthcare sector is noted as an underappreciated opportunity within UK equities, offering:

• Defensive characteristics during periods of economic uncertainty
• Exposure to demographic-driven demand growth
• Attractive valuations relative to global healthcare peers
• Innovation in pharmaceuticals and medical technology

While UK real estate has faced headwinds from higher interest rates, the sector is positioned for a significant re-rating as the Bank of England normalizes monetary policy:

• Commercial property values are expected to stabilize
• Industrial and logistics real estate benefits from e-commerce growth
• Residential exposure captures housing demand recovery

---

Recent market data demonstrates the strong momentum supporting UK equities:

Index	Current Level (Feb 2026)	52-Week Range	YTD Performance
FTSE 100	~8,173 → 10,314	7,545 - 10,373	+26.2%
FTSE 250 (Mid-caps)	~4,511 → 5,617	4,118 - 5,651	+24.5%

The FTSE 250 mid-cap index is particularly compelling, trading at approximately 12.4x forward earnings compared to the FTSE 100’s 13.1x multiple, representing a significant discount that is expected to narrow in 2026 [3].

• UBS base case: FTSE 100 at
  10,000 points
  by year-end 2026
• Upside scenario: 10,800 points
• Downside scenario: 7,200 points [3]

---

Given the favorable risk-reward dynamics, global portfolios should consider overweighting UK equities relative to their strategic asset allocation:

• Rationale
  : UK equities trade at a substantial discount to other major markets, even comparing sectors on a like-for-like basis [6]
• Valuation Support
  : Trailing P/E of 13.1x (FTSE 100) versus 29x for US equities [3]
• Earnings Momentum
  : Expected acceleration in corporate earnings through 2026

The FTSE 250 offers superior upside potential relative to large-cap peers:

• Higher domestic earnings sensitivity to UK GDP growth
• Significant valuation discount (12.4x forward earnings)
• Higher dividend yield (4.3% vs 3.5% for FTSE 100) [3]
• Greater operational leverage to economic recovery

Within UK equity allocations, prioritize:

Sector	Recommendation	Rationale
Banks	Overweight	Earnings momentum, dividend growth
Industrials	Overweight	Cyclical recovery exposure
Materials/Mining	Neutral-Overweight	Commodity supercycle
Utilities	Overweight	Defensive growth, valuations
Healthcare	Neutral	Underappreciated, defensive
Consumer Cyclical	Underweight	Pressure from sector rotation

Ninety One’s UK Equity Team emphasizes a quality-focused approach:

“We remain optimistic about the store of value we see in the portfolio, both in Quality businesses in out-of-favour industries which will recover in time, and in Quality compounders which are in control of their growth.” [6]

Given the dispersion in UK equity returns and the importance of stock selection, active management may enhance returns relative to passive indexing:

• Rathbone UK Opportunities Fund
  : Focus on small and mid-cap opportunities
• TM SDL UK Buffettology Fund
  : Value-oriented approach to long-duration UK equities [3]

---

While the outlook is constructive, investors should remain cognizant of potential headwinds:

1. Fiscal Policy Uncertainty
   : If the UK government abandons fiscal discipline, gilt yields could rise, impacting equity valuations [3]
2. Currency Exposure
   : Potential pound depreciation could affect overseas revenue translation
3. Commodity Volatility
   : Approximately 25% of FTSE 100 earnings are commodity-linked [3]
4. Geopolitical Risks
   : Global trade tensions and potential tariff impacts remain uncertain

---

NIESR’s upward revision of UK growth to 1.4% for 2026 reflects a genuine improvement in the UK’s economic fundamentals. The sectors best positioned to drive this outperformance include

, , , , and .

For global portfolios, the current environment argues for:

• Overweighting UK equities
  relative to strategic allocation
• Favoring mid-cap exposure
  (FTSE 250) for superior valuation support and earnings leverage
• Prioritizing quality
  in sector and stock selection
• Considering active management
  to capture the significant dispersion in UK equity returns

The combination of attractive valuations, improving earnings momentum, and supportive monetary policy creates a compelling investment case for UK equities as a diversifier within global portfolios.

---

[1] NIESR Economic Outlook Autumn 2025 - https://niesr.ac.uk/reports/economic-outlook-autumn-2025

[2] Institute for Fiscal Studies - Economic Outlook: Navigating Narrow Paths - https://ifs.org.uk/publications/economic-outlook-navigating-narrow-paths

[3] Interactive Investor - UK Stock Market Outlook 2026 - https://www.ii.co.uk/analysis-commentary/uk-stock-market-outlook-2026-ii537645

[4] Discovery Alert - UK Banking Gains Drive Market Confidence in 2026 - https://discoveryalert.com.au/uk-banking-leadership-market-confidence-2026/

[5] Baker Steel Capital - Outlook 2026: Miners in the Spotlight - https://www.bakersteelcap.com/2026/01/21/outlook-2026-miners-in-the-spotlight-are-we-at-the-start-of-a-multi-year-upcycle-for-commodities/

[6] Ninety One - UK Equities 2026 Outlook - https://ninetyone.com/en/united-kingdom/newsroom/uk-equities-2026-outlook-an-attractive-alternative-to-the-concentrated-trade