The shares and trusts brokers are backing this year

With the new year under way, the prospect of lower interest rates has been overwhelmed by geopolitical chaos. Confidence therefore still feels fragile.

That backdrop is shaping how brokers think about their stock picks for 2026. AI remains a factor in some of the favoured companies, but analysts are also positive on industrial names.

UK equities still trade at a discount to global peers, albeit more narrowly than this time last year, but analysts are not convinced that alone is enough to drive returns. They are increasingly steering clients away from broad recovery trades and towards businesses they believe can perform even if growth disappoints.

That helps explain why there’s little consensus on must-own stocks, but agreement on the qualities that matter: resilience, cash generation and clear paths to earnings growth. We should also note that brokers often have ties to the companies they are backing, especially where they act as corporate advisers.

Resilient industrials

RBC Capital Markets puts Rolls-Royce (RR.) in its list of favoured European capital goods stocks, arguing that the FTSE 100 engine maker is now on a “steady footing”. After years of operational problems, from engine durability issues to the impact of Covid-19, performance has stabilised under chief executive Tufan Erginbilgiç.

Engine reliability has improved, execution has become more consistent and cash generation over the 2022 to 2024 period is five times higher than before. From this steadier base, RBC argues that the group’s wide-body civil engine portfolio alone could justify 70 per cent of its current market capitalisation, despite contributing only just over a third of sales.

RBC stresses that its outlook for the capital goods sector doesn’t rely on a short-term cyclical rebound, but a continuation of existing structural drivers. That thinking underpins its backing for aerospace manufacturer Melrose (MRO) and mining equipment and servicing business Weir (WEIR), which it describes as “undervalued quality”.

The broker pointed to Weir’s relatively “secure earnings profile”. More than 90 per cent of profits come from after-market servicing – maintaining and supplying parts for equipment already in use – rather than selling new machinery, helping smooth its performance even when new mining equipment orders soften.

Wide moats against AI disruption

Data and information groups had a difficult 2025 as investors fretted that generative AI could disrupt subscription revenues. London Stock Exchange Group (LSEG) was among those caught in the sell-off, but Barclays thinks the reaction has been overdone and sees 43 per cent potential upside.

The broker argues that LSEG’s core growth drivers remain intact and that clearer disclosure has helped show that actual revenue risks from AI look much smaller than investors first feared. Panmure Liberum makes a similar case, grouping LSEG alongside Experian (EXPN) and Relx (REL).

While AI models may be becoming commoditised, high-quality, licensed and proprietary data is not, which analysts think remains a powerful advantage. Online classified advertising companies such as Auto Trader (AUTO) enjoy a similar moat, with Bank of America noting that fears around higher investment requirements due to AI have created an attractive entry point.

The broker points to strong pricing power, a dominant market position and new AI tools supporting growth, even with vehicle supply still tight into the new year. “We expect solid guidance at FY25 results to reassure the market on Auto’s long-term growth potential, spurring re-rating,” said analyst David Amira.

Consumer-facing stocks

In the consumer space, Barclays sees 44 per cent potential upside in easyJet (EZJ), a view shared by Panmure Liberum. The key attraction is easyJet Holidays, which analysts see as a major source of low-risk earnings growth. The business requires little extra capital and benefits directly from the airline’s network and brand. 

Panmure Liberum analyst Gerald Khoo said a wide breadth of routes allows more destinations and higher flight frequency than many rivals, while brand strength keeps marketing costs low. He argued that easyJet Holidays can’t be replicated by competitors “due to the underpinning of easyJet’s leading leisure route network”.

Short-term challenges remain on the airline side, however, including new European bases getting off the ground and delayed route restoration in the Middle East. Even so, Khoo said the arrival of larger A321 aircraft should bring cost savings. 

Among smaller names, Peel Hunt backs On The Beach (OTB). The broker argued that growth is coming from platform scale, better conversion, repeat bookings and marketing efficiency, rather than a sudden surge in holiday bookings. The same broker also likes DFS Furniture (DFS), even if consumer spending remains subdued.

Peel Hunt’s analysts described DFS as being able to grow even in a subdued housing market, with gains coming from cost management. It added that unlike other retailers, the group has a net cash position, significant operational leverage and is now in a position to restart the dividend this year.

Investment trusts

Equity-focused investment trusts need a niche to attract investors, given their higher fees compared with passive options. This means two of the top picks for 2026 in this space come with fairly high risk ratings.

BlackRock Frontiers (BRFI) and Bill Ackman’s Pershing Square (PSH) are popular among brokers. The BlackRock trust, which invests in frontier markets such as Saudi Arabia, Poland and Turkey, was recommended as an income play by both Peel Hunt and Kepler, which uses a quantitative method to screen top-rated trusts for growth and income, as well as Winterflood also backed it. The trust does not have an income target, but offers a yield of about 4 per cent, which is the result of cash generation from its portfolio companies.

Meanwhile, Ackman is trying to recast his trust in the mould of Warren Buffett. “The forthcoming acquisition of an insurance company will help to turn Pershing Square portfolio company Howard Hughes into a Berkshire prototype,” as Winterflood analysts put it.

They said they “await details on the financing of that transaction and consequent portfolio concentration risk”, but still think the trust’s current discount (28.5 per cent as at 19 January) is too high and that there are possible catalysts for it to narrow in 2026.

Kepler analysts noted how, while income investors tend to have an home bias, this is “not for want of strong opportunities” elsewhere, with Asian trusts for example scoring particularly well. In this space, both Kepler and Peel Hunt suggested Aberdeen Asian Income (AAIF).

Closer to home, a popular option is Law Debenture (LWDB), rated for income by both Peel Hunt and Kepler. Winterflood switched Temple Bar (TMPL) for Lowland (LWI), noting that while both funds performed well last year thanks to their value bias, the latter now offers better value. As at 19 January, the first was trading at a slight premium, while the second was on an 8.3 per cent discount.

Among the 20 trusts rated by Kepler for growth, many deploy a value approach, especially Temple Bar, Aberforth Smaller Companies (ASL), Fidelity Asian Values (FAS) and Murray International (MYI); Kepler analysts noted that these four have a much stronger value tilt than any of the 2025 winners in the same category.

“Japan also figures highly, with three trusts that, to a greater or lesser extent, are explicitly targeting opportunities thrown up by corporate governance reform,” the analysts added. “This has obviously been a great trend to play in order to generate alpha.”

The three trusts in question are CC Japan Income & Growth (CCJI), AVI Japan Opportunity (AJOT) and Nippon Active Value (NAVF). The first is also backed by Peel Hunt as an income play, while the second also features in Winterflood’s list.

Additionally, the European Smaller Companies Trust (ESCT) has both Kepler’s and Winterflood’s support – its analysts said they “see a clear catalyst for [ESCT]’s re-rating, following a busy period of corporate activity in 2025”.

In the alternatives space, popular options include Greencoat UK Wind (UKW) and 3i Infrastructure (3IN). Peel Hunt acknowledged that the first is exposed to the changes to renewables subsidies proposed by the government, but says it considers the likelihood of these actually being introduced as low, “given the wider ramifications for attracting private investment into public infrastructure and the crucial role of renewable energy generation”.

Meanwhile, 3i Infrastructure trades on a narrower discount than its peers – 5 per cent as at 15 January, against an average of 14.2 per cent for the AIC infrastructure sector. But Winterflood said this reflects expected exits as well as the trust’s strong record of returns and realisations.

Winterflood analysts have dropped Pantheon International (PIN) and Seraphim Space (SSIT), which had been included in their 2025 picks. The first was removed because they think there are stronger private equity funds of funds out there, including HarbourVest Global Private Equity (HVPE).

Seraphim was originally added when it was close to a 70 per cent discount, with investors “clearly misjudging the quality and prospects of the portfolio”. But now that the trust trades on a premium – 26.7 per cent at the time of writing – “the risks are much more balanced”, they added.