Is now a good time for UK equities?

The UK stock market has been a source of considerable frustration. Investors have remained impervious to improving earnings, high dividends and buybacks, buoyant merger and acquisition activity, and low valuations. However, 2025 has provided a glimmer of hope that the UK stock market will be rediscovered, with the FTSE 100 on track for its strongest year in more than a decade.

The FTSE 100 is up 19.4% for the year to date*, edging towards the symbolic 10,000 mark. Its strength has been led by defence companies such as Rolls-Royce, Babcock International and BAE Systems. Mining group Fresnillo has been another success story on the back of gold and silver price strength. It has also been a good year for the banking sector, with Lloyds, NatWest and Barclays all delivering strong returns. 

However, the gains have been confined to the larger capitalisation stocks. The FTSE 250 and FTSE Small Cap have languished some way behind. The FTSE 250 is up 8.9% for the year to date, while the FTSE Small Cap is up 8.8%*. This isn’t awful, but compares unfavourably with the rest of the UK market, and with other countries. 

A ‘Doom Loop’ narrative

The main reason for the relative unpopularity of this part of the market is the ongoing concern over the UK’s economic performance. This has some justification: the prevailing narrative has been that the UK is facing a ‘doom loop’, whereby the Chancellor raises taxes to meet the fiscal rules, thereby stymying growth, and making the fiscal headwinds even worse. Inflation is still stubbornly high, while attempts to curb public spending have been largely unsuccessful. 

Scott McKenzie, manager on the WS Amati UK Smaller Companies fund, points out that the timing of the Budget has also been unfortunate: “Delaying the UK Budget to the 26th of November has further extended the period of uncertainty and feeds into caution among both businesses and investors.” There has been persistent speculation about new taxes, which has dented confidence and left investors disinclined to invest in their domestic market. 

But UK fund managers are increasingly challenging the narrative of UK weakness. The UK’s debt problems are no worse than those of most developed nations, and somewhat better than those of France, Canada, the US or Japan. The UK’s GDP growth is forecast to be the second highest in the G7 in 2025**, and new trade deals, planning reform and lower interest rates could also contribute. The UK government is at least attempting some kind of fiscal rectitude, which is not always evident among its peers. 

Simon Murphy, manager on the VT Tyndall Unconstrained UK Income fund, told us recently: “There are three big parts to the economy. There’s the private sector in terms of consumers, there’s the private sector in terms of companies, and then there’s the government sector. Both sides of the private sector are in reasonable health. It doesn’t mean we’re off to the races, but consumers have very strong balance sheets. They’ve been saving a lot of money, so savings rates are very high. We’ve still got relatively low unemployment. We’ve had decent wage growth. So consumers actually are in an okay place. What they lack is a bit of confidence to go out and spend materially. But they’ve got the wherewithal to do so. 

“And to a similar degree, UK corporates are in a pretty good place as well. If you think back to when the pandemic struck, corporates massively repaired their balance sheets and preserved their cash flows very aggressively in the face of an extreme, uncertain event.”

Compelling valuations and mid-cap opportunities

Then there are the valuations, which – if anything – have got cheaper over the past 12 months because earnings have outpaced share prices, particularly for mid and small-caps. Scott says: “Valuations in UK equities do look compelling. Significant discounts exist compared to global peers and support continues to appear in the form of takeover activity, share buybacks and robust corporate earnings and news flow. While UK markets still face the headwind of retail fund outflows, it is telling that US and European institutions increasingly appear on share registers of UK-listed companies across the market-cap thresholds.

“The US equity market has rarely been as highly valued as it is today by a variety of measures, including Schiller PE ratios and market cap to GDP. By contrast, the UK stock market continues to trade at depressed levels despite improved returns this year.”

Alan Dobbie, manager on the Rathbone Income fund, says this undervaluation is particularly evident in the mid-cap sector. “We’re pleased with the performance (of large-caps), especially since we hold many of the stronger performers, but we’re also now seeing real opportunity in mid-caps. The rally has given us a chance to recycle capital from large to mid, where valuations are still very attractive. Yes, the upcoming Budget poses some risk, particularly for domestic earners, but we think that’s more than priced in.”

A defensive alternative to US tech

These are not the only arguments for looking at the UK today. The make-up of the UK market means it provides a bulwark against any weakness in the US technology sector, at a time when investors are increasingly fearful about the valuations there. 

The UK is already benefiting from a shift in sentiment around US exceptionalism. Alan believes that while the AI boom is clearly transformative, from an investment perspective, the latest rally has the hallmarks of a late-stage surge in a long bull market. Investors are starting to question how sustainable it is to keep adding new money to US tech, and some, it seems, are starting to diversify.

He adds: “That’s where the UK comes in. It’s a lower beta market, more defensively positioned, and has a track record of resilience. We saw that in 2022 when the FTSE All-Share was one of the few global indices to post a positive return. And again this year, it held up well during the March and April tariff tantrum, reminding investors of its value in a broader portfolio.”

The Budget could be a catalyst. While the Chancellor undoubtedly has difficult decisions ahead, the final outcome is unlikely to be as bad as feared, particularly with the recent drop in gilt yields. Scott points out that UK economic expectations are now at rock bottom: “Any positive outcomes could see confidence and company valuations improve quickly, particularly if there is any money flow back into UK equities.”

*Source: MarketWatch, 29 October 2025

**Source: IMF, October 2025