The recent outperformance of UK value stocks could well continue over the medium to long term, according to several investment professionals. However, concentration of the MSCI UK Value index, public finances and shorter-term performance drivers should be considered carefully. While the recent rhetoric has surrounded the outperformance of behemoth tech and AI names in the US, and memory stocks in Asia, the numbers tell a different story.
According to data from FE fundinfo, the MSCI United Kingdom Value index has returned 31.4% over the past 12 months, to time of writing (26 August), outperforming the MSCI United Kingdom, MSCI All-Country World and the S&P 500 indices by more than 10 percentage points each.
The trend has quietly continued over longer timeframes, with the UK’s value index having returned 91.2% over the past three years. In contrast, the S&P 500 has gained 64.4% over the same period, while the MSCI United Kingdom is up 65.1%. UK value stocks have even outperformed emerging market equities over the period, with the MSCI Emerging Markets index having returned 72.4% over three years.
Over the past five years, the MSCI United Kingdom has gained 125.6%, while the S&P 500 is only up 80.2%. MSCI Emerging Markets has been left trailing with a five-year gain of 51.8%. This ties in with analysis from investment platform IG, which found that had investors ignored the hype around the tech-focused ‘magnificent seven’ stocks and instead backed some of the UK’s less glamorous sectors, such as industrial metals or telecoms, they would have seen returns up to 21 percentage points higher, from the start of 2026 to the end of July.
Ben Ridley, head of equities at T. Bailey Asset Management, says: “It is a genuinely interesting and, I suspect, widely overlooked observation that the MSCI UK Value index has outperformed the broader UK market, the S&P 500 and emerging markets over three years, one year and six months.
“Banks and energy have been the primary drivers. They are also outsized weights in the MSCI UK Value index. Financials account for around 40% of the index and energy around 20%. Within financials, the index is concentrated, with HSBC alone representing roughly half of the sector exposure.
Nina Stanojevic, senior investment specialist, St. James’s Place
‘The relative recent weakness of some of the highly-valued US growth companies has created a more favourable backdrop for value. But we think there is more to the story than a short-term sector effect’
“Defence has also been an important contributor to the wider UK market amid heightened geopolitical risk, although financials and energy are much more material exposures within the MSCI UK Value index itself.”
Will James, portfolio manager of the Guinness Pan-European Equity Income fund, points out asset-heavy businesses first began to outperform during the aftermath of Covid as inflation started to rise.
“At least [investors] know what they may be worth, and by association, it makes it harder for new entrants to enter established players’ markets, given, for example, the rising costs of building new machinery,” he explains.
“Due to the outperformance of growth long-duration assets in the previous five years, the move in value was amplified, given the rotation away from growth in the face of inflation and higher interest rates.”
Nina Stanojevic, senior investment specialist at St. James’s Place, agrees the outperformance of UK value has been helped by the composition of the market.
“Financials, energy and defence have all performed strongly, while the relative recent weakness of some of the highly-valued US growth companies and EM tech that previously dominated global returns has also created a more favourable backdrop for value. But we think there is more to the story than a short-term sector effect.”
Index composition
Simon Murphy, manager of the VT Tyndall Unconstrained UK Income fund, points out that although the UK Value index has 33 constituents and claims to cover approximately 85% of the free float-adjusted market capitalisation in the UK, “a cursory look at the latest factsheet” at the end of July 2026 shows the top 10 holdings as approximately 76% of the index.
“Within that, just six companies make up 52% of the index, from just two sectors – banks and oil and gas,” he explains. “HSBC, Barclays, NatWest and Lloyds make up 32% of the index, while Shell and BP are 20%.”
T. Bailey’s Ridley agrees concentration risk is worth highlighting, arguing that the sustained performance “needs leadership to broaden into industrials and more diversified financial sectors, and other companies where valuations remain attractive relative to their cash generation and earnings resilience”.
That said, Tyndall’s Murphy argues that value investing has historically outperformed growth on average over long periods of time, and “exhibits one of the strongest long-term empirical records in investment”.
Nikki Martin, senior portfolio manager of global equities, Sarasin & Partners
‘AI leaders may continue to produce excellent operating results, but a highly-valued share can deliver an ordinary investment return if expectations are already exceptional’
“However, value can often go through sustained bouts of underperformance, frequently lasting a decade or more, as has been the case through much of the period since 2010.”
According to figures from the Institute of Business and Finance, published at the end of February using data from the FTSE Russell Style indices, value stocks typically beat growth 63% of the time over one-year periods, 78% of the time over five-year periods and, over 20 years, 94% of the time.
Tom Grady, fund manager on the Schroders Value team, adds that when looking at the biggest winners in the Schroder Recovery fund relative to the FTSE All Share over the past 12 months, “these include businesses in sectors as varied as consumer staples, telecoms, energy, pharmaceuticals, mining, consumer discretionary and insurance, with this diversified list also including a healthy balance of cyclical versus more defensive sectors”.
Is the value rally sustainable?
Tony Whincup, head of wealth planning intermediary investments and distribution at TrinityBridge, agrees with Guinness’s James that a preference for heavy assets over companies exposed to AI disruption – otherwise known as the Halo trade (‘heavy asset, low obsolescence’) – could be a significant factor at play. However, he adds: “It is too early to say whether this represents a lasting shift in investor preference.
“Whether the UK value trade becomes a trend is less clear. Some may feel that its [price-to-earnings] discount to the US is justified given that the UK lacks the world-beating technology names so prevalent in the US.
“The US remains home to many of the companies leading the AI theme and delivering strong earnings growth, so a valuation premium is likely to remain justified. We therefore would not conclude that investors should simply sell US growth and buy UK value.
“The stronger argument is for diversification, particularly if returns continue to broaden beyond a relatively narrow group of US technology stocks.”
Guinness’s James adds: “AI can’t drill for oil or mine gold. In addition, geopolitics has also highlighted the importance of strategic assets in the energy space. As ever, it is far more nuanced than that, but in the age of thematic baskets, smart beta, active quant, momentum as a factor has strengthened considerably and given the UK index is overweight value names, the moves in many respects have been amplified.”
A symbiotic relationship
Rather than a blunt rotation out of growth and into value, Hywel Franklin, portfolio manager of the Mirabaud Discovery Europe fund, says he expects there to be “a broadening out of the leadership within the market, which allows companies in the value space to participate”.
“The low level of expectations for a lot of companies means the bar to positively surprise investors is also set low, which should prompt new interest in areas that have underperformed this year so far,” he says.
Nikki Martin, senior portfolio manager of global equities at Sarasin & Partners, says value stocks do not require AI-related shares to collapse in order to outperform: “The central issue is starting valuation,” she reasons. “AI leaders may continue to produce excellent operating results, but a highly-valued share can deliver an ordinary investment return if expectations are already exceptional.
“Conversely, a modestly growing value company can produce a strong return through dividends, buybacks and even a small re-rating.”
She adds that AI may also benefit value companies indirectly, with the likes of banks, insurers and retailers all able to use automation to reduce costs and boost productivity.
Will James, portfolio manager, Guinness Pan-European Equity Income fund
‘Momentum as a factor has strengthened considerably and given the UK index is overweight value names, the moves have been amplified’
“Value is most likely to outperform if market returns broaden, interest rates remain positive, nominal growth is resilient and investors place greater weight on present cashflows,” she says. “It may continue to lag if technological earnings repeatedly exceed expectations and capital keeps concentrating in the largest US tech companies.
“Investors do not need to choose between AI and value. A diversified portfolio can own structural growth while using UK quality and value shares for income, cash returns, lower starting valuations and exposure to a different set of economic outcomes.
“The UK’s attraction is that relatively little future optimism is embedded in today’s prices.”
Long-term trajectory for the UK
In fact, Martin says she is “more positive on UK equities than [she has] been for several years”.
“I am currently overweight UK equities relative to their small representation in global indices. My view is based principally on valuations and prospective shareholder returns rather than on an expectation that the UK will suddenly become the world’s fastest-growing market.”
T. Bailey’s Ridley adds that, while the oil price and UK base rates present cyclical risks, the UK’s structural drivers remain strong.
“The UK’s persistent valuation discount to global peers, the corporate activity its discount attracts, buybacks steadily shrinking the share count and domestic institutional money edging back to UK equities after two decades of net selling are all multi-year factors, and are reasons why we see this as more than a rate-cycle trade.
“UK value continues to offer comparatively undemanding valuations, a high dividend yield, significant shareholder distributions and exposure to businesses with resilient cashflows. It is therefore a useful diversifier for global investors, particularly alongside more technology-heavy US equity exposure, irrespective of the shorter-term value-versus-growth debate.”
James Lowen, co-manager of the JOHCM UK Equity Income fund, says UK value stocks “have further to run”, as their current performance drivers are “enduring” and, “in some cases, accelerating”.
“UK value stocks have done well because their starting valuation was extremely low (and in many cases remains so). In many areas performance has been improving, balance sheets remain strong and boards are using them to accrete value, for example, through stronger dividend growth, bolt-on acquisitions and share buybacks.
“Incoming M&A links to low valuations. It is materially more than just the weight of oil in the FTSE indices.”
Schroders’ Grady adds: “While we don’t base an investment case on M&A potential, it is interesting to see both Tate & Lyle and easyJet among our biggest winners over the past year, both of which are subject to takeovers from US acquirers, demonstrating the attractive value offered by UK-listed companies to overseas investors.”
Watch out for headwinds
That’s not to say that investing in the UK is without risk. Mirabaud’s Franklin, for example, warns: “The lack of economic growth acceleration is the biggest headwind facing the UK, as it has historically been one of the key drivers of stock performance.
“The second question mark we have is regarding the outlook for the UK government balance sheet, and the ability to achieve a cost of finance which is feasible and supportive of growth.”
Sarasin & Partners’ Martin agrees that weak economic growth and pressure on public finances, which could result in higher corporate employment of investment taxes, could present risks: “Continued withdrawals from UK equity funds may constrain valuations and market liquidity. Meanwhile, takeovers and moves to US listings risk removing more high-quality companies from the domestic market,” she adds.
Allocating to the UK
Overall, however, Martin believes this most recent strong performance in UK value stocks feels different from the sudden spike seen in 2022, after which growth technology leadership began tentatively returning.
“Back then, UK shares were inexpensive but lacked obvious catalysts. Inflation and interest rates were rising, domestic funds were experiencing persistent withdrawals, political credibility had been damaged by repeated policy changes, and takeover bids often seemed to be the only mechanism through which value was realised,” she explains.
Looking at the UK market today, balance sheets are generally healthy, dividend yields are high, and buybacks have become more prevalent as a means of boosting total shareholder returns.
“Banks and insurers are returning surplus capital, while a wider range of companies are more willing to dispose of underperforming divisions or engage with potential buyers. This means that the total return case is less dependent on hoping for valuation expansion, which may never occur.”
SJP’s Stanojevic also believes conditions remain supportive for the outperformance of UK value stocks to continue. However, she warns returns “may not continue at the same pace and we wouldn’t assume that every value sector will benefit equally”.
“Valuation gaps have narrowed in some areas, but UK value as a whole does not look expensive, particularly relative to parts of the US market where expectations remain elevated,” she explains.
“For that reason, we still see opportunities in UK value. The attraction today is not simply that value has recently outperformed. It is that investors can still access fundamentally strong, cash-generative businesses at reasonable valuations, while gaining exposure to a very different mix of companies and return drivers from those that dominate global equity indices.”
Guinness’s James adds that, while there are “reasons to still be positive on specific areas of UK value”, “quality companies have also proven that they are navigating the top-down factors and perceived AI pressures very well”.
“At the same time, valuations in these companies have come down a lot while the traditional value sector has re-rated – the valuation line between value, quality and growth has started to blur. The question is now, where is the value? Not necessarily where you would expect it to be.”
