Why Do We Like the UK Stock Market?
The UK stock market is a ‘marmite’ asset class in the world of wealth management. Over the last decade, we have witnessed a marked shift away from UK equities in favour of international markets. This decision has partly been justified by performance, but could this trend now be changing?
One of the main issues the UK has faced in the last 20 years has been persistent selling by pension funds. In 2000, UK pension funds held 50% of their assets in UK equities. The chart below highlights how that has changed, with these institutions now owning just 2.8%. This highlights the lack of support for our domestic market versus peers who are heavily invested in their own markets. UK Chancellor Rachel Reeves has identified this as a major problem: any regulatory or structural reforms encouraging pension funds to reallocate towards UK equities could act as a powerful catalyst.
| COUNTRY | Domestic Equity Allocations | MSCI Weighting | Relative Weighting | |
|---|---|---|---|---|
| Australia | 37.7 | 1.3 | 2,800 | |
| Italy | 41.0 | 0.6 | 6,733 | |
| Japan | 49.4 | 4.4 | 1,023 | |
| France | 26.0 | 2.7 | 863 | |
| USA | 63.5 | 43.2 | 47 | |
| UK | 2.8 | 4.5 | -38 | |
Inflation and interest rates have dominated investor concerns in recent years. We have experienced a spike in inflation in the past two months, because employers are putting up prices to combat the National Insurance contribution rises. Despite this, we see little evidence to suggest that, on a medium-term view, inflation is not under control, although we do concede that it is likely to be both more elevated and volatile than in the previous 10 years.
Our view is supported by falling input costs in business surveys, declining energy prices, a strengthening pound, and easing wage pressures. As shown in the chart below, the UK has made meaningful progress in reducing inflation. Given this progress, we expect the Bank of England to implement further interest rate cuts over the next 18 months: this will be supportive for both consumers and corporates.
Source: JP Morgan Guide to the Markets, July 2025
The UK stock market remains cheap on a valuation basis, and while this does not drive stock markets in the short term, there is a mass of academic evidence showing that cheap valuations lead to strong stock market returns over the long term.
Notably, while public investors may not yet be recognising the value in UK equities, corporates are. This is visible in two key trends:
Increased M&A Activity: Since the start of 2024, 13% of the total value of the FTSE 250 (the so called ‘mid-cap index’) has been subject to takeover bids.
Record Share Buybacks: UK-listed companies themselves are recognising their undervaluation. In 2024 alone, FTSE 100 companies repurchased approximately £57 billion worth of their own shares.
UK companies are also proficient at paying dividends to shareholders and offer some of the highest distributions in developed markets. In a more volatile world, dividends act as a good source of protection in addition to providing benefits to investors on a total return basis.
The chart below shows the performance of the UK market over the last five years. This includes the reinvestment of dividends, a factor which is often overlooked.
Source: FE Analytics, July 2025
What is the risk in the UK?
The main risk in the UK is the current state of the government’s finances. We believe there is a high probability that Chancellor Reeves will have to raise taxes in some form in the Autumn: markets will expect this but still take it poorly on announcement.
The UK market has performed strongly this year, allowing us to take some profits and marginally reduce our position, selling into strength. We maintain an overweight position to the UK in our multi-asset portfolios and continue to have confidence in this market on a medium-term basis.
Ross McKnight
Ross joined CAM in 2024 and is a Senior Investment Analyst. He is involved in multi-asset research and is a member of our asset allocation committee. Ross previously worked as a Research Analyst at WH Ireland and is a CFA Charterholder. One of his biggest career highlights to date was being named in Citywire’s “30 Under 30” to watch. Ross is also a member of the Ireland Funds Great Britain Young Leaders Society, which is a philanthropic network that supports worthy causes in Ireland and around the world.
