(Reuters) - Despite macroeconomic conditions improving, it was "too early to be bullish" on British stocks, HSBC (LON:HSBA) said on Wednesday, due to concerns over a weak earnings outlook and limited room for improvement in valuations.
"We remain cautious on UK equities; whilst macro activity seems to have bottomed, the earnings and valuation picture is not encouraging," HSBC said in a note.
Although British services started the year on a robust footing, and consumer confidence and personal savings seem to be supportive, HSBC strategists believe the improving macro landscape should "feed through to better equity market sentiment, but not until later in the year".
UK corporate earnings should grow "marginally faster" than consensus estimates, HSBC said, warning, however, that further upside would be limited.
Against this backdrop, HSBC downgraded the UK banks sector to "underweight" from "neutral", but upgraded the financial services sector to "overweight" from "underweight" on strong earnings and price dynamics.
The brokerage also revised its recommendations for some consumer-related sub-sectors.
In terms of broader regional markets, HSBC downgraded Italian stocks and double downgraded Spanish equities to "underweight" on weakness in earnings and price momentum.
So far this year, Italy's benchmark index has gained 5.3%, while Spain's IBEX 35 index is marginally up just 0.1%. In comparison, the broader STOXX 600 index has risen 2.4% year-to-date.
HSBC upgraded healthcare-heavy Danish equities to "overweight" from "underweight".