UBS Ltd. says it sees limited upside in global equity markets, and it is heavily underweighting the U.S.

In a new research report, UBS suggests that global equity markets will be flat to up just 5% in coming months, based on solid macro factors. It notes that valuations seem attractive, but that impression may be distorted by the fact that earnings are cyclically high.

Global GDP growth is forecast to slow to 3.7% in 2006 from 4.3% in 2005, and to trend lower still in 2007. “Analysts’ estimates of cash flow spending have been revised up again. Bottom-up estimates of [capital expenditure], M&A and payout have all increased,” it notes. “This is true for all regions and thus, we believe, remains supportive of economic growth.”

On a regional basis, it recommends underweighting U.S. equities, and overweighting regions that are in recovery mode. It particularly favours Europe, excluding the UK, Japan, and the rest of Asia. UBS suggests that structural change in Europe and Japan should see valuation multiples there move toward US levels.

“European ex-UK companies are raising spend more quickly on payout and acquisitions than capex, which we view as positive for shareholders,” it notes.

By sector, it recommends overweighting telecoms, healthcare and technology, and underweighting financials, industrials, utilities and consumer discretionary stocks.