Introduction

After a strong 2025 performance supported by defense, mining, pharmaceuticals and energy, the FTSE 100 enters 2026 with improving macro conditions—lower inflation, a potentially softer Bank of England, and renewed investor appetite.

At the same time, valuation gaps between UK, US and EU markets create unique arbitrage opportunities that long-term investors can exploit.

This report provides:

• FTSE 100 outlook for 2026
• Sector-by-sector expectations
• GBP movement impact
• Arbitrage strategies between UK, U.S. and EU markets
• Professional portfolio templates

1. Macro Outlook for 2026

✔ 1.1. Monetary Policy

With inflation cooling, the Bank of England is expected to move toward a more flexible stance.
Implications:

• Banks → narrower margins
• Industrials/mining → easier financing
• Consumer/services → recovery potential

✔ 1.2. GBP Volatility

Since 70%+ of FTSE 100 revenues come from outside the UK, GBP movements matter greatly:

• Weak GBP → boosts exporters and dollar-earning companies
• Strong GBP → reduces profit translation

✔ 1.3. Commodity Cycle

Mining and energy stocks remain sensitive to China and global growth. Metal and energy demand will shape performance in 2026.

2. Strongest FTSE 100 Sectors for 2026

⭐ Defense & Aerospace

Geopolitical tension and rising defense budgets create sustained demand.
Babcock is positioned well.

⭐ Pharmaceuticals & Healthcare

AstraZeneca benefits from demographic trends and global healthcare investments.

⭐ Mining & Precious Metals

Fresnillo remains highly volatile but offers strong upside during risk-off cycles.

⭐ Financials

Lower interest rates may hurt margins but stimulate credit growth.

⭐ Consumer & Services

Gradual recovery expected as UK domestic economy stabilizes.

3. Key Risks for 2026

• GBP strength impacting FTSE exporters
• China slowdown affecting mining/commodity stocks
• EU–UK trade policy uncertainty
• Energy and environmental regulations
• Global recession pockets

4. Arbitrage Strategies: UK vs US vs EU

⭐ Arbitrage #1 — FTSE 100 Value/Commodities vs S&P 500 Tech

FTSE valuation discounts remain wide vs U.S. tech.
A blended approach can reduce risk and enhance upside.

⭐ Arbitrage #2 — GBP/USD Currency Arbitrage

Currency cycles produce opportunities for long–short exposure across UK and U.S. markets.

⭐ Arbitrage #3 — Inflation Hedge (UK) vs Consumption Play (EU)

FTSE 100 has stronger exposure to commodities (inflation hedge),
while EU indices lean toward manufacturing and consumption.

⭐ Arbitrage #4 — Dividend Yield Arbitrage

FTSE 100 is one of the world’s highest-yielding major indices.
Income-focused investors can exploit yield differentials.

5. 2026 Portfolio Strategy (Balanced Growth + Arbitrage)

| Component | Allocation | |-----------|------------| | Babcock (Defense) | 20% | | AstraZeneca (Healthcare) | 20% | | Fresnillo (Mining) | 15% | | FTSE 100 Broad ETF | 20% | | U.S. Nasdaq ETF (Growth Exposure) | 15% | | Cash / FX Hedge / Gold | 10% |

This model offers:

• UK defensive growth
• U.S. tech upside
• Diversification across currencies
• Inflation hedge via commodities

Conclusion

FTSE 100 remains undervalued compared to U.S. indices and continues to attract global investors seeking income, value and selective growth.

2026 is shaping up to be a year where sector rotation + FX cycles + valuation gaps create multiple arbitrage opportunities.
With disciplined allocation and global balancing, investors can benefit from both the stability and the upside that FTSE 100 offers.