19 Oct 2026
In recent history the UK equity market has lagged global developed markets, yet there are signs that the tide is turning. Some of the characteristics that previously held the UK market back, including its sector mix, may now be working in its favour.
By mid-August, the S&P 500 had returned 11.5% year to date, compared with 12.5% from the FTSE 2501. The valuation gap has remained striking: the S&P 500 trades on an average forward estimated price-to-earnings multiple of 19.5 times, while the FTSE 250 trades on 12.7 times. Put simply, the UK appears priced for mediocrity, with little allowance for success, but we do not believe that accurately reflects the opportunities available.
Over the last couple of years, concentrating investments in a relatively small group of companies has paid off. More recently, however, market leadership has begun to broaden beyond the businesses enabling the artificial intelligence build-out, with investors looking increasingly at AI adopters, international markets and industries with their own distinct structural growth drivers.
The AI trade has offered tremendous upside, but it has also brought considerable volatility and sharp reversals in individual share prices. As the theme develops, it is understandable that investors may want exposure to other, uncorrelated, sources of return.
This is where the UK can play a useful role. Its larger weightings in financials and commodities give the market a more defensive profile and provides diversification from technology-heavy US indices. Importantly, that does not mean investors must sacrifice growth. There are a number of stocks in the CG Aegon Ethical Equity Fund for example that we think are able to provide upside without adding further layers of AI exposure.
Informa is one such example. The global events business has expanded the data and intelligence services it provides to customers, creating additional ways to monetise the information generated through its events. While disruption in the Middle East has affected the business, management continues to communicate clearly and guide investors through this period of uncertainty ensuring confidence in its future growth.
The opportunity is also becoming more visible further down the market-cap spectrum. The FTSE 250 had been derating relative to the FTSE 100 since mid-2021. More recently, that direction has began to change, with mid-caps outperforming their larger peers. This is an area where investors can go fishing for companies whose prospects are not yet reflected in their share prices.
Markets have divided companies into AI winners and everyone else. The UK has largely been lumped into “everyone else” or even worse labelled an AI loser. To us that judgement looks too simplistic.
The discount in the technology sector between the UK and the US illustrates this well. The UK technology sector trades at roughly a 30% discount to its US counterpart, despite the two sectors having traded broadly in line with one another after the Global Financial Crisis. As in all markets some businesses will undoubtedly be disrupted by AI, but others should benefit from the additional investment and complexity it creates.
Softcat, a value-added IT reseller for example, helps organisations source, build and manage their technology infrastructure. As businesses develop their AI strategies, many first need to establish the foundations on which those strategies will run. Softcat acts as an intermediary in that process and increased its guidance in its May update as demand came through in its results.
The UK’s valuation discount has become so familiar that investors might mistake it for fair value. The market trades at approximately a 30% discount to the US and an 8% discount to Europe. While the US has typically commanded a premium, that premium expanded markedly during the AI boom.
The discount is also widespread. Some 56% of FTSE 100 constituents and 76% of FTSE 250 constituents trade below their ten-year average relative multiples. These are often established businesses with tangible assets and recurring cash flows. Not to forget, the premium dividend investors also receive by investing in UK stocks. The FTSE 350’s forward dividend yield is 3.7% vs the S&P 500 at 1.2%. Investors are being offered cash-generative companies at discounted prices rather than being asked to pay up today for distant expectations.
St James’s Place illustrates a stock-specific opportunity where we think the valuation is unreasonable. Concerns about AI and competition for advisers pushed its valuation towards levels significantly below its long-term average. In our view, those risks are more than reflected in the share price, while the company’s future cash-flow potential and exposure to the multigenerational transfer of wealth remain underappreciated.
Corporate buyers appear to have noticed this valuation phenomenon. In the first eight months of 2026, the UK market recorded its highest deal volume in two decades, excluding years containing mega-mergers. If investors need any further evidence that the UK stock market is too cheap, this is it.
The case for UK equities is therefore about more than simple 'cheapness’. The market offers diversification, exposure to structural growth themes and opportunities in businesses whose prospects are being overlooked. A rerating does not require perfection. It may only require investors to recognise that mediocrity is not the only outcome.
1Source: J.P. Morgan Europe Equity Research, 24 August 2026. Returns in GBP.