As we approach the halfway point of 2026, UK equities have struggled to maintain some of their 2025 gains, as geopolitical conflict and domestic instability have shaken investor confidence.
According to data from FE fundinfo, the FTSE All Share surged 24% in sterling terms in 2025, one of the best performances among all major equity markets. However, 2026 so far has been far less profitable, delivering the worst performance among major equity markets year-to-date.
Investors have found themselves grappling with sticky inflation and muted GDP growth, as the conflict in Iran has rippled through the global economy, and political instability as UK Prime Minister Keir Starmer’s position has come under fire.
A return to more downtrodden narratives about UK equities has followed suit, after investors seemed to regain some confidence in 2025. According to recent IA data more than £1.5bn was pulled from UK equity funds in the first quarter of 2026.
But for many UK managers, this negativity makes little sense.
See also: Covered: Something’s brewing in UK Equities.
Mike Fox, head of equities at Royal London Asset Management, argues investors are underestimating the “incredible comeback” the UK market has made in recent years.
“The media has largely stopped writing about the death of the UK market; it’d probably kill them to write the renaissance of it,” he says.
He adds it is crucial to remember that most UK companies have very international earnings, insulating them from the muted performance of the UK economy.
See also: ‘The respite is short-lived’: Industry reacts to lower-than-expected UK inflation.
On top of this, the market remains cheap with the UK trading on a cyclically adjusted price-to-earnings (CAPE) ratio of around 19x, still well below the market highs of 28x it reached in 1999 and 2000, according to Barclays data.
And despite the negative narratives, some stocks and sectors have been on extraordinary runs, such as UK financials.
In the past three years, the FTSE All Share Financials ex investment companies index has spiked 113.5%, while the wider FTSE All Share was up just 51%.
Mike Fox, head of equities at Royal London Asset Management
‘The media have largely stopped writing about the death of the UK market; it’d probably kill them to write the renaissance of it’
Alex Wright, portfolio manager of Fidelity Special Values and Fidelity Special Situations, believes they have much further to run.
“Banks have delivered strong performance in recent years, but this has largely been driven by improved earnings rather than a substantial re-rating.”
Historically, banks have traded at around 11-12x price-to-earnings (P/E), but estimates for 2027/28 had several UK banks on earnings of closer to 9x, according to the Fidelity manager. “[This] remains a meaningful discount to both their long-term history and the broader UK market on around 13x,” Wright continues.
“While banks have become more investable for some investors, they remain under-owned by many due to their complexity,” he tells Portfolio Adviser.
Clive Beagles, co-manager of the JOHCM UK Equity Income fund, believes banks could be well-positioned moving forward.
“When crises happen, people run from the hills away from banks, because of worries about leverage and debt,” he says. “When war broke out, they fell because that’s simply what people think banks do during conflicts.
“I get that, but interest rate expectations changing as they have means banks will make more money, not less.”
As a result, Beagles has added back to banking holdings such as Lloyds, which he had initially pulled money from after strong profits.
Meanwhile, Ian Lance, manager of the long-running Temple Bar Investment Trust, has been finding opportunities in former quality growth stocks.
Lance had previously never held Guinness owner Diageo in his entire investing career, because it used to be “crazily expensive” (around 30x P/E) despite declining fundamentals.
He says: “The fans of the stock used to justify it because it was a fantastic business with a strong moat.
“It turned out you were paying way too much for it, and it wasn’t as good as you thought.”
See also: Nick Train: ‘We acknowledge the strategy has not been working for too long a time’
However, as the valuation has cratered to 10x, there are now some potential catalysts for a turnaround, according to Lance.
Dave Lewis has stepped in as the new CEO, famously responsible for turning around Tesco after a period of underperformance, and there are hopes he could do the same for Diageo, Lance says.
“You don’t know what he’s going to do yet, but there are the ingredients for what you could almost call a recovery story.”
SMID caps: The bull market no one is talking about?
While the FTSE All Share was up 24% last year, this was not a broad-based performance.
Large-cap stocks left their smaller counterparts for dust, with the FTSE 100 up 25.8% in 2025, while the FTSE 250 and Deutsche Numis Smaller Companies rose some 12% by comparison.
However, Marlborough’s Eustace Santa Barbara argues small and mid-cap markets are full of opportunities hiding “in plain sight”.
See also: Jupiter: Why SMID caps remain best opportunities in UK market, despite ‘horror show’ performance
UK small and mid caps have “done nothing really” for managers over the past five years, he concedes, and sentiment has remained depressed following multiple hits to investor confidence.
However, “in terms of where the UK market stands right now, it’s probably worth remembering the words of John Templeton: ‘Bull markets are born on pessimism, grow on scepticism, mature on optimism and die on euphoria.’”
Looking forward, investors have plenty to get excited about, he says. “12-15% of companies in the ecosystem trade on low single digits and have dividends above that, and almost 50% are doing share buybacks.”
Meanwhile, because investors and analysts have avoided this part of the market, stocks remained under-researched, which means even small changes in sentiment could lead to rapid growth, he argues.
“Right now there are areas of the UK market – particularly smaller companies – which have many of the ingredients for a bull market: pessimism, low valuations and apathy,” he adds.
Richard Staveley, manager of the Rockwood Strategic trust, is more sceptical, warning that for a true bull market in UK mid and small caps, the asset class needs positive flows, issuances and IPOs, all of which have been muted.
“You’ve definitely not been seeing positive flows into UK mid and small caps; in fact, it’s been quite the opposite,” he says.
That said, Staveley argues there are still plenty of opportunities in the smaller end of the market. This, he says, is because it has become much more inefficient as research and media coverage has fallen away, and investors have become concentrated primarily on the FTSE 100.
“You’ve got the opportunity to spot things that are plain view if you’re bothered to dig around,” the Rockwood manager says. “But because no one else is, I feel like I’m picking up pounds for pennies all day long.”
A generational discount?
Even multi-cap UK managers such as Clive Beagles see opportunities further down the market cap spectrum.
“The valuation gap between the FTSE 250 and the FTSE 100 is now wider than it was after the Brexit referendum, wider than at the worst point of the Covid pandemic.
“That doesn’t mean we will always go buying mid caps, but it does mean that we’re hunting more in that space because stocks are underperforming for invalid reasons.”
The JOHCM UK Equity Income fund has some 48% in FTSE 250 and FTSE Small stocks, a historical high for the fund, according to Beagles.
Clive Beagles, co-manager of the JOHCM UK Equity Income fund
‘The valuation gap between the FTSE 250 and the FTSE 100 is now wider than it was after the Brexit referendum, wider than at the worst point of the Covid pandemic’
A stock that appeared interesting to him recently was the sofa and furniture retailer DFS. The share price has fallen some 50% in the past five years, but for Beagles and the team, it represents a solid cyclical opportunity.
He argues the business has almost 40% market share and will almost certainly see share prices spike because sofas inevitably wear out and need to be replaced.
“I can’t tell you when it will start to perform,” he says. “But I can tell you that it’s a capable management team with a strong balance sheet, and at some point, those shares will likely be more than the current £1.20.”
Alexandra Jackson, manager of the Rathbone UK Opportunities fund, adds that because strong performance in the FTSE 100 has not yet trickled down, there is a “generational valuation opportunity” available in the SMID cap space.
She points to businesses in the industrial sector, which currently represent her largest overweight in the portfolio at almost 32%.
“It’s such a broad sector, and it has so many exposures in terms of geographies and cycles that no matter what’s happening in the world, whatever the market’s current obsession is, you can find a business that can make money,” she explains.
“Quality companies with very strong balance sheets are being priced as if they’ll never improve,” she says. “For active managers, that feels like a very fertile environment.”
