The UK equity market seems finally to be throwing off the relentless negativity that has dogged investor appetite for many years. Natalie Kenway investigates whether opportunities are stirring in an asset class that has been unloved for so long
The UK stockmarket has hit record highs this year, becoming one of the best-performing developed markets year to date, despite a gloomy economic outlook with some even pointing to a recession.
The performance, and various other indicators, has meant investors are re-engaging with UK equities for the first time in years in what is being called a surprise comeback for UK stocks, even amid a landscape of high debt, sticky inflation and sluggish growth. Furthermore, many fund commentators are predicting the asset class is still offering a compelling investment opportunity despite the recent highs.
“UK equities have defied expectations this year,” says Alexandra Jackson, manager of the Rathbones UK Opportunities fund. “Despite all the doom and gloom, the All-Share has delivered one of its best year-to-date performances in three decades – a reminder that markets often move ahead of the headlines.”
With so much to consider in terms of politics, economics, international exposure, sector biases and rich valuations, is the equity market really at a turning point after being out of favour for so long?
Unloved for a decade
There are a number of reasons why UK equities have been shunned during the past decade, but Brexit can be singled out as the biggest structural hit to sentiment.
“The market has been pretty unloved since 2016,” says James Klempster, deputy head of multi-asset at Liontrust. “For overseas investors, the UK just got filed under ‘too hard’. They couldn’t be bothered to try to interpret Brexit, so they looked elsewhere.”
Since then, the UK has seen high political turnover with four prime ministers shifting priorities in Budgets and post-Brexit trade arrangements, entrenching a perception of inconsistent fiscal policy and overall instability.
As a result, the UK’s weight in the MSCI World index has fallen sharply over the past 20 years – from about 10% to 4% – giving international investors fewer reasons to own the asset class, and passives and trackers also drifting away.
“For US investors, it’s just ‘part of Europe’ now,” says Klempster.
Alexandra Jackson, fund manager, Rathbones UK Opportunities
‘UK equities have defied expectations this year. Despite all the doom and gloom, the All-Share has delivered one of its best year-to-date performances in three decades – a reminder that markets often move ahead of the headlines’
“When you look at the UK market, 10 years ago it was pretty much the most expensive it had ever been,” adds Alex Wright, fund manager of Fidelity Special Situations and Fidelity Special Values. “When the Brexit referendum came, there was a catalyst for non-UK investors to divest. They were divesting from a very expensive level, and so it meant there was a long way to run.”
See also: Fidelity’s Alex Wright: Catalyst for UK equity outperformance has already happened
Additionally, investors over this time have favoured growth and tech names, which are not abundant in the UK stockmarket, while the sectors more prevalent in the UK – banks, oil & gas, tobacco and miners – have been less popular. ESG and sustainability themes have been actively avoided in more recent years, spelling more bad news for UK equities.
“For years, everyone piled into US tech – and the UK was ignored by comparison,” says David Cumming, head of UK equities at BNY Investments.
“Sectoral composition didn’t lend itself to the flows at the time – oil and tobacco weren’t getting the tailwind from the sustainable investment theme,” Klempster adds.
UK pension funds have also been sellers of domestic equities, with these instead switching into bonds and overseas assets. Simon Gergel, head of the UK equity team at AllianzGI and manager of the Merchants Trust, explains: “Domestic pension funds and insurance companies have gone from owning half the market 40 years ago to owning less than 5% today. They’ve sold pretty much all they can.”
This steady drip of selling has pushed prices down, and combining this with the weaker UK economic outlook, it has become a vicious circle of negativity, deterring global investors further.
For the 10 years to 2023, the FTSE All-Share produced an annualised return of 6-8%, lagging behind the US, which returned about 12-13% annualised (according to figures from MarketWatch).
Performance story
But something has shifted, and the UK is now, as mentioned, one of the best-performing developed markets in 2025.
The FTSE All-Share has returned 14.5% year to date (to 31 August 2025), its fifth-strongest year-to-date performance since 1995, and outperforming all major markets except the German DAX, according to Rathbones data. By contrast, sterling investors in the S&P 500 have seen gains of just 3%, thanks to a weak dollar, with the MSCI World index up 5%.
“While investors remain cautious about government debt and inflation, strong company earnings and resilient demand have underpinned returns,” Jackson says.
The outperformance can be attributed to some key factors: cheap valuations that have encouraged overseas investment, and a more defensive sector mix that has helped navigate a volatile backdrop. Effectively, some of the reasons the UK equity market was being ignored are now working in its favour – valuations have become too cheap to ignore and the sectors that make up the All-Share are now popular trades.
“The FTSE 100 trades at 13.8 times earnings – 12% cheaper than its own long-term average, and dramatically cheaper than the US on 27 times,” says Tyndall IM’s head of partnerships James Sullivan. “It won’t take much demand to re-rate it positively.”
Investors have also been keen to move away from the US stockmarket following president Donald Trump’s controversial introduction of global tariffs and perceptions US equities are now looking expensive.
Big-time opportunities in small and mid-cap stocks
Investors are, of course, always seeking fresh opportunities and after the strong large-cap performance in the UK, fund managers are looking further down the cap scale. If the UK equity stockmarket has been unloved, UK small and mid-caps have been even more so – but as a result some have been predicting the large-cap rally will lead a smaller companies recovery that is only just beginning.
“Small caps tend to outperform large caps as they grow their earnings quicker,” according to Ben Mackie, fund manager at Hawksmoor Investment Management.
“Over longer periods, small caps tend to beat large caps but what’s happened over the last 10 years is small caps have materially underperformed despite the earnings or fundamentals not being way behind large caps. This underperformance has been driven by a material de-rating. You have gone from a situation where investors would pay a premium for small caps because of the superior growth they tend to deliver overnight to being about to buy small-cap firms trading on a discount to large. That is pretty unusual and definitely an opportunity to exploit.”
Some say the resurgence further down the cap scale has already begun: “It’s been an extraordinarily good time for UK value and mid-cap stocks. From April, the turnaround in the UK mid-cap market has been stark – outpacing the main market by about 8% in the second quarter. That’s a historically very wide margin,” notes Fidelity’s Wright. “There is a real renewed bid out there for UK mid-caps, which has been lacking for quite a long time.”
He flags trading patterns show mid-caps are being snapped up in the afternoon, indicating it is US investors that are buying up UK mid-cap stocks in a bid to diversify away from the US.
He also highlights further possibilities: “The global benchmark dictates the US is where investors have 70% of their money. Is that necessarily the best idea when the dollar is weakening and other markets are looking strong? And you don’t need much in terms of investors moving from the market that’s 70% of global allocation to one that’s 3% in order to really move the dial. You can see what this means for near-term performance.” Liontrust’s Klempster adds: “Mid and small companies remain at a valuation discount to larger ones – and sentiment is improving. They could offer the best returns from here.”
Wright comments: “The US market, in my eyes, continues to be significantly overvalued, and the UK looks decent value both versus other markets and then also versus itself.”
UK stockmarkets also have significant weightings to tobacco, utilities and banks, and this defensive market mix can be popular during periods of volatility, such as the one sparked by Trump’s ‘liberation day’ announcements on 2 April.
“We have seen a lot of money coming out of the US since the big issue of liberation day,” says Ken Wotton, managing director of public equity at Gresham House. “Global equity managers have been thinking, ‘How do I de-risk? How do I diversify my very concentrated US exposure given the uncertainty with policy etc?’ A significant amount of money has gone into UK and European equities. The UK has been the biggest recipient of that driving the FTSE 100 to outperform relative to the US in sterling terms.”
Financials have done particularly well – the likes of UK-listed banks NatWest, Barclays and Standard Chartered were up 80-100% last year and have moved a further 30-40% higher in 2025, notes Ian Lance, manager of the Temple Bar investment trust and Redwheel UK Value fund.
“We have also seen a lot of takeovers of UK companies and share buybacks where companies are reinvesting and buying back lots of undervalued stock. This has driven earnings growth and share prices up.
“At long last, people are allocating to the UK. The market was so cheap it only took a small shift in flows to move prices.”
AllianzGI’s Gergel and Gresham House’s Wotton also note how buybacks and M&A have helped UK prices recover, with Gergel highlighting “companies themselves are big buyers – around £40–50bn a year in buybacks – taking 1.5-2% of the market away annually”. Wotton adds: “Private equity is buying UK businesses at a premium, because they see the discrepancy in valuations.”
Turnaround story
When you put this all together it can be quite a powerful catalyst for the UK market, but with such high returns over the past year and markets hitting record highs, is there still return potential in the UK?
Fund commentators argue yes, UK equity valuations, earnings and flows make the UK one of the few developed markets with headroom.
“Even though the FTSE 100 is at its highest, it’s still trading at multi-decade discounts to both the US and Europe. That creates a valuation opportunity,” says Wotton.
Almost all the commentators interviewed by Portfolio Adviser note UK valuations remain historically and relatively low. Klempster adds: “You can’t simply say the UK isn’t a buy because it’s at all-time highs. Stockmarkets are compounding machines – they spend much of their time near records. The real story is valuation, not the level.
Further, profit margins are above their long-term average and earnings growth expectations remain positive. Gergel points to the many domestically focused companies trading on “modest valuations and depressed earnings”. “As housing and consumer activity recover, those earnings will rebound,” he says.
Simon Gergel, head of UK equities, AllianzGI
‘The UK is still the most under-owned developed market in the world. You don’t need a flood of capital – just a change in perception’
And after years of relentless outflows, it appears investors are returning to the UK. Research in Finance, which surveys advisers and discretionary wealth managers on a quarterly basis, found 38% of DFMs feel the UK sector offers a good investment opportunity – second to the US.
Word of caution
On the back of a period of being deeply unloved, there remains some caution around the asset class. Research in Finance’s CEO Toby Finden-Crofts says: “Views remain mixed. While some professional investors are genuinely optimistic, others are adopting a more cautious ‘wait and see’ approach until the UK economy shows greater signs of stability – a watching brief.”
This is backed up by the Investment Association’s flows for August where IA UK All Companies was the worst-selling sector with outflows of £645m.
Retail investor appetite, however, does tend to lag behind that of global and institutional investors and the reasons for outperformance over the past year – M&A, buybacks, valuations, earnings and some could even say an improvement in political stability, with the Labour Party coming to power with a strong majority – all boosting positive sentiment.
The economic gloom will continue to hog headlines, especially in the lead-up to chancellor Rachel Reeves’ Budget – the only thing investors seem to agree on is the tough job she has in balancing fiscal books and improving the economic picture.
Additionally, concerns remain around the possibility of a UK recession, but the consensus, however, is largely that one will be avoided, albeit with weak growth in 2025. For example, the Bank of England’s August 2025 Monetary Policy Report projects Q4 GDP growth staying about 1.25%, not negative.
Investors are quick to point out though, the economy and the stockmarket are not necessarily directly correlated. “You don’t need a booming economy for the stockmarket to offer good opportunities,” says Wotton.
And because many forecasts are so low, even a modest earnings or sentiment boost could deliver outsized equity returns relative to the cautious growth baseline. “The UK is still the most under-owned developed market in the world. You don’t need a flood of capital – just a change in perception,” notes Gergel.
Contrarian bet
The UK equity market is showing renewed strength but, after a decade of being overlooked, it appears investable again. And even though UK equities have enjoyed strong relative performance recently, and still have a number of potential headwinds investors need to be cautious around, the UK market seems to be offering rich opportunities – not because everything is rosy but because expectations are still so low.
An investment into UK equities right now could potentially be one of the best contrarian opportunities investors have seen for some time.
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