Nine UK stocks make this European top stock picks for 2025

This team of experts has just updated its list of best ideas in Europe, which includes some of the most popular UK shares. Its list of tips has been a great performer in the past.

27th November 2024 13:12

Graeme Evans from interactive investor

National Grid (LSE:NG.) and Tesco (LSE:TSCO) are among the top picks after a Wall Street bank flagged the “material scope for alpha generation” under the surface of Europe’s recent market underperformance.

Morgan Stanley’s favoured 39 European stocks heading into 2025 include nine from the UK after Rolls-Royce Holdings (LSE:RR.), International Consolidated Airlines Group SA (LSE:IAG), National Grid, Severn Trent (LSE:SVT) and Rio Tinto Registered Shares (LSE:RIO) kept their places from August’s selection.

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The newest entries are Barratt Redrow (LSE:BTRW), which is backed with a 36% upside to the bank’s price target, and British Land Co (LSE:BLND) based on the potential for shares to go 34% higher.

The list of European top picks has delivered total growth of 52.9 percentage points in local currency terms since its 2021 inception, having continued its outperformance versus the MSCI Europe index during this summer's growth scare and after US elections.

The bank recently downgraded European equities to Neutral but believes that’s no reason to overlook individual stocks in the region.

It said: “A question we have been getting from some investors is 'why spend time on the region considering the likely continued underperformance versus the US’?

“Our answer, backed with a high degree of conviction, is the material scope for alpha generation under the surface of EU equities' headline performance.”

The top picks represent analysts' highest conviction ideas within their coverage universe.

Barratt Redrow is the only one from housebuilding after the bank recently resumed coverage with a target of 580p. It highlights the potential catalyst of planning reforms, given that Barratt is the largest housebuilder with a broad portfolio of house types and geographic exposure.

It said the company’s 16% relative underperformance versus the average of the volume builders Persimmon (LSE:PSN) and Taylor Wimpey (LSE:TW.) provided an attractive entry point.

A friendlier interest rate environment is key to supporting house sales, although Morgan Stanley warned that Bank of England inflation caution could yet put a lid on demand in 2025.

On British Land, the bank says the property firm has emerged from a challenging decade with a solid balance sheet and sensible portfolio yields. It believes that limited supply of quality space should drive pricing power and allow the group to deliver medium-term returns of 8%-10%.

REITs such as British Land have been highly rate-sensitive, meaning that further rate cuts and falling gilt yields should drive outperformance. In the meantime investors are being paid to wait, with a 6% dividend yield.

The bank, which has a price target of 520p, added: “The whole property sector is out of favour, buffeted by top-down concerns, in particular around the UK Budget and post the US election, which reduced investor appetite for domestic European capital-intensive businesses.

“We argue that markets are extrapolating the present but this may go on for longer.”

Among the other UK top picks, the bank has a 21% upside to a Tesco target price of 427p.

It said: “Near term, volume growth and market share trends are best in class, which is enabling margin expansion through better mix and volume leverage.”

The bank sees upside risks to the current £2.9 billion 2025 adjusted retail profit guidance and expects the buyback programme to be increased to £1.2 billion. The stock is regarded as inexpensive on a multiple of 11.9 times forecast 2026 earnings.

Barclays (LSE:BARC) shares are backed to go 42% higher to 375p, while National Grid offers a potential upside of 25% to 1,225p.

The bank expects the energy transmission and distribution firm to outperform after its £7 billion rights issue ushered in a fresh start for the equity story.

The bank said: “The stock has an attractive combination of defensive appeal, inflation-linked dividend (with a 5% yield) and high-single-digit earnings growth.

“In our view, Grid boasts better inflation protection, and even tailwinds, than many regulated network assets, with long-term asset growth in UK electricity networks and US networks overlooked.”

On Rolls-Royce, the bank is in line with the current share price as it awaits the next potential catalyst of annual results on 27 February.

It said: “2025 guidance will be a key watch item, with expectations for continued progress in profit and cash towards medium-term guidance that we think can now be achieved in 2026 versus the management target of 2027.”

The bank’s target prices on British Airways owner IAG, Rio Tinto and Severn Trent point to upsides of 28.5%, 25% and 15% respectively.

These articles are provided for information purposes only. Occasionally, an opinion about whether to buy or sell a specific investment may be provided by third parties. The content is not intended to be a personal recommendation to buy or sell any financial instrument or product, or to adopt any investment strategy as it is not provided based on an assessment of your investing knowledge and experience, your financial situation or your investment objectives. The value of your investments, and the income derived from them, may go down as well as up. You may not get back all the money that you invest. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.

Full performance can be found on the company or index summary page on the interactive investor website. Simply click on the company's or index name highlighted in the article.

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