02 Oct 2025
Hugh Gimber, Global Market Strategist | Zara Nokes, Global Market Analyst
With US equities, and by extension global equities, hitting new all-time highs, UK stocks can act as a more defensive equity allocation.
Having lagged global stock markets for much of the last decade, UK equities have been stealthily outperforming in 2025. Given the extent of negative headlines, this may seem somewhat counterintuitive.
The UK government’s fiscal woes are coming into sharp focus ahead of the Autumn budget. The labour market is already weakening following the national insurance hikes announced last November, and yet the Bank of England is hesitant to cut interest rates to support growth given sticky inflation. With departmental budgets stretched, tax revenues as a share of GDP at the highest since the late 1940s, and changes to the fiscal rules having been repeatedly ruled out, it appears there are no easy options for the Chancellor to plug a sizeable fiscal hole. We will write about the UK budget in more detail later in the Autumn, but at this stage it seems that new investment to stimulate growth will be very hard to come by.
UK payroll employment
Net monthly change
Source: LSEG Datastream, ONS, J.P. Morgan Asset Management. Data as of 16 September 2025.
So why, given the domestic doom and gloom, are UK equities still well worth their place in portfolios today? We see multiple reasons.
Firstly, the performance of UK stocks and the UK economy are only loosely related. With close to 80% of revenues generated overseas, whether or not UK consumers are in rude health frankly has little impact on FTSE 100 returns. Even the FTSE 250, which is often cited as a much more domestically focused benchmark, generates just over 60% of its revenues internationally, according to data from FactSet. In the current environment, the lack of link between the UK economy and the stock market is a positive thing for equity investors.
Second, with US equities (and by extension global equities) hitting new all-time highs, UK stocks can act as a more defensive equity allocation. With relatively high weights to lower beta sectors like consumer staples, and a healthy dividend yield of well over 3%, the FTSE 100 has typically proven more resilient when global stocks have come under pressure. This has particularly been the case during times where inflation fears are the source of the shock – a key risk for the coming quarters. For investors looking to diversify away from the elevated valuations in megacap technology stocks specifically, the UK market’s mere 1% in tech may finally be starting to look helpful rather than a hindrance.
Valuations are another key part of the story. UK investors are understandably fed up with being told that the FTSE 100 is cheap, having watched the FTSE’s discount to global equities widen in 24 of the last 36 quarters since the Brexit referendum in 2016. Yet the recent acceleration in both M&A activity as well as share buybacks suggests that many believe these discounts have now gone too far. The first half of 2025 saw 31 bids for UK companies valued at over £100m market cap at an average premium of 39% vs. the pre-announcement price, according to data from Peel Hunt. On a sector-by-sector basis, UK companies continue to trade at hefty discounts to their US peers, but have managed to claw back some of this gap in all but two sectors in 2025.
Equity market sector weights
% of total market cap
Source: LSEG Datastream, MSCI, J.P. Morgan Asset Management. UK: MSCI UK; Developed market: MSCI World . Real estate is not included in these sector breakdowns due to the small size of the weight in each index. Past performance is not a reliable indicator of current and future results. Data as of 16 September 2025.
MSCI UK relative valuation vs. the US
%, relative discount/premium based on 12-month forward P/E ratios
Source: IBES, LSEG Datastream, MSCI, S&P Global, J.P. Morgan Asset Management. The chart shows the current percentage discount of the index or sector 12-month forward P/E ratio vs. the equivalent for the S&P 500, and the average since 1995. Communication Services average is calculated using data from 1995 to 2000 inclusive and from 2005 to date, due to sector composition changes. Past performance is not a reliable indicator of current and future results. Data as of 16 September 2025
UK policymakers appear increasingly aware that the current wave of M&A cannot be left unchecked, with the government’s Leeds Reforms announced in July explicitly citing the need for policy changes that will encourage companies to both list, and stay, in the UK. With households having saved a staggering £870 billion since the pandemic, and the need to generate growth becoming ever more pressing, there are strong incentives for policymakers to find new ways to persuade a significant chunk of this money to find a more productive, but still domestic, home.
A much stronger pound could pose a risk to this positive UK large cap outlook, but the fragility of the economy makes this scenario unlikely. Given the high weight of international revenues cited above, the FTSE 100 can come under pressure when GBP appreciates. We do expect continued US dollar weakness against a broad basket of currencies over the medium term, as capital flows adjust to a world where the US economy no longer looks quite as exceptional. Yet with GBP already up 9% vs. USD in 2025, the UK’s weak growth backdrop is likely to limit the extent of further GBP appreciation. If threats to Fed independence led to a more disorderly turn lower for the US dollar (and a sharper move higher for the pound), we would expect to see all US assets coming under pressure. This could lead to the FTSE 100 still outperforming the S&P 500 despite GBP appreciation.
In sum, with a challenging Autumn budget looming at a time when the growth backdrop is already sluggish, the headlines are unlikely to paint a pretty picture of the UK over the coming months. Yet, investors would be wise to separate the macro from the market. A defensive sector profile, strong M&A activity, a potential policy shift and a supportive currency all point to UK equities being well worth their place in global portfolios.
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