Our Opinion: 2025
Time to back Britain
The UK stock market has been languishing for decades. But the tide is turning and smart investors should buy in now.
Things haven’t been great for the UK stock market over the last two decades. It has been a serial underachiever, especially when compared with the US. It has seen poor returns and there have been significant outflows from the market, with UK equity funds experiencing net withdrawals for several years in a row. There has been an exodus of firms quitting the London market, going private instead, or heading for the American exchanges. In some quarters this has given rise to the perception that the UK market is (or may become) uninvestible. There are, however, some rays of hope. An uptick in performance over the past few months has seen the FTSE outpace the US market. With valuations at attractive levels, this looks like a good time to start backing Britain.
Some of the poor performance of UK-listed shares is down to factors beyond anyone’s control, as investors naturally tend to gravitate towards the companies that are seen as ‘fast-growing.’ Over the last 15 years, a large chunk of this growth has been come from a handful of large tech firms, initially in the form of the FAANGs (Facebook, Apple, Amazon, Netflix and Google) and more recently the “Magnificent Seven” (Meta, Microsoft, Alphabet, Amazon, Apple, Nvidia and Tesla). Their success has made the US the place to be invested now, which has in turn taken the limelight away from both Europe and the United Kingdom.
Some of these wounds have been self-inflicted. Britain’s current government says that “things will get worse before they get better”. Investors understandably find this approach somewhat less appealing than America’s current emphasis on “making America great again”.
Such problems have just piled on top of the underlying structural ones. US markets have benefited from the willingness of both American institutional and retail investors to take on huge amounts of risk, which has given their firms access to large pools of capital. By contrast, British investors have proved to be much more risk averse. Successive waves of regulations have forced pension funds to shun shares in favour of bonds, to cover their liabilities, and many of them have shifted their remaining shareholdings from domestic to global index funds. All these things have weighed negatively on the British stock market.
The poor performance of the UK market over the past few years may have caused frustration for investors, but it has also made its shares attractive from a valuation perspective. The UK market has nearly always traded at a discount to the US of around 10%-20% in terms of price/earnings and price/sales ratios, but today the ‘discount to the discount’ is around 30%-40%. And the US market isn’t the only one that the UK trails – there are plenty of great London-listed companies that are trading at much lower multiples than comparable companies listed in other countries.
UK companies also provide a much better income than those in other countries. So even if valuations don’t improve, you will still benefit from getting more in dividends than you would elsewhere. UK firms may have faced criticism in the past for putting payments to shareholders above future investment and balance-sheet stability, only to be forced to slash dividends when things turn sour, but today’s dividends are on a much more solid basis in terms of dividend cover (the ratio of dividends to earnings).
British companies are also taking advantage of the low valuations to buy back their own shares, which helps investors by boosting earnings per share. The UK has one of the higher distribution yields (the combination of dividends and buybacks), with the FTSE 100 at 6.1%, compared with 4.4% for France’s CAC 40, 3.5% for the German DAX and only 2.4% for the S&P 500. UK investment trusts are also trading at a much higher discount than normal to the value of the net assets in their portfolio. The average discount is 12.7%. This is less than the 18.9% it reached in October 2023, but still substantially below the average of the last 17 years of around 8%.
Interest from abroad may help boost valuations, but it is not a long-term solution to the languishing UK market. Fortunately, the fundamental outlook for UK shares is also improving thanks to strong fundamentals. The Aim junior market continues to be a critical platform for high-growth businesses, while the main market continues to list many world-class companies, particularly in the pharmaceutical, financial, support-services and infrastructure and energy sectors. Going forward, these companies should act as a key driver in boosting the performance of the UK market and closing the valuation gap.
Since the pandemic, UK consumers have been saving more and consuming less, motivated by an uncertain economic outlook and the need to refinance mortgages. But consumers’ confidence is on the rise and, along with the interest-rate cuts that are on the horizon, this should help to boost the economy. Trump’s decision to impose swingeing tariffs in April, combined with his impulsive behaviour and frequent policy changes, has also made investors, both in the UK and around the world, think that they might want to put more money into non-dollar assets. Political uncertainty in the UK, on the other hand, is starting to dissipate, especially in sectors such as energy. Hence UK companies in those areas are starting to seem a lot more attractive.
1st September 2025
