23 Jun 2025
The UK has been out of favour for years, but some investors are starting to see it as a relatively safe port in stormy waters as previous headwinds subside. How should investors access this heavily discounted market? We believe a portfolio built on a combination of ‘Quality’ and ‘Value’ can best capture the diverse range of bottom-up investment opportunities the UK offers.
A sense of calm
The UK has been a rather gloomy place to manage long equity money in recent years, with outflows becoming the norm. This weak sentiment has been understandable. In 2016, we had the Brexit vote, with the UK narrowly voting to leave the European Union. Throw in a pandemic, rampant inflation and six prime ministers, the headwinds were manifold. But finally a sense of calm is emerging.
If indeed the UK is increasingly perceived as a safer port in stormy waters, particularly in a world of heightened political risk, investors are set to benefit. Despite a strong first half of 2025, the UK equity market still trades at a substantial discount to other major markets – the FTSE All-Share trades at about half the S&P 500’s P/E ratio of 26x, for example.
Time to reconsider
According to Ninety One’s Capital Market Assumptions framework, the UK is forecast to deliver some of the strongest annual returns of any equity market over the next decade, across both developed and emerging markets.
Figure 1: The UK equity market is forecast to deliver attractive returns
Source: Ninety One proprietary Capital Market Assumptions as at 31 March 2025. These estimates reflect the view of Ninety One’s multi-asset team, while the views of other teams across Ninety One may differ. Performance does not guarantee future results. Actual returns could be materially higher or lower than projected. For information on our Capital Markets Assumptions methodology, please see this link.
From a macroeconomic perspective, while headlines typically err on the negative side, there are reasons to be positive on the UK. May’s quarterpoint reduction was the fourth time the Bank of England has cut interest rates since the summer of 2024, as inflation declined from the multidecade high reached in October 2022. While growth has been sluggish, the UK economy has also avoided a recession – which had been predicted by some commentators – and there are signs of improvement, such as the first-quarter GDP figure of 0.7%, the fastest growth rate in a year and the highest in the G7. Recent trade deals with the US, India and the European Union could also help improve sentiment.
The current level of equity markets also suggests a reasonable starting point for a UK allocation. Although the FTSE 100 has almost recovered from April’s challenges to currently sit close to the record high this year1, mirroring US and European peers, the FTSE 250 – a much better barometer of UK-specific sentiment – is still down about 10% from its 2021 highs. The valuations of many UK businesses continue to look interesting. Helping to suppress valuations generally, many UK active funds have and continue to be forced sellers of equities given the outflows that have been happening at a UK macro level.
It is important to remember that, as well as some well-run, cheap domestic businesses, the UK is also home to many global champions that trade at lower valuations than their peers elsewhere. This mix of UK focused and globally-oriented companies allows for the construction of attractively valued, diversified portfolios.
And then there are buybacks, which support share prices and are rising in many countries outside the US, but fastest of all in the UK (see Figure 2). In addition, UK companies continue to return cash to shareholders with particularly generous dividends relative to most other advanced economies.
Figure 2: Buybacks in the UK have surged since 2020, even rising above US counterparts. Dividend payouts are also very generous.
Source: Ninety One, Factset as of April 2025.
For investors, then, the UK offers the potential to capture returns from re-ratings, earnings growth and capital returns. After all, we would argue that the best investments are made when buying a growing stream of cash flows at a cheap price.
We are not the only ones to notice the growing appeal of the UK market. Five FTSE 100 companies and 19 stocks in the FTSE 250 index received bids last year, the bulk of which were successful. The average value of deals was £1.07 billion, nearly three times higher than the £390 million average in 2023. In total, there were £49 billion worth of recommended bids versus £17.2 billion the prior year2.
How to access the UK market
In short, we believe UK equities offer exposure to a diverse range of businesses at attractive valuations relative to the US and some other markets. So how best to invest in UK equities? We believe quality and value are two distinct yet complementary approaches to accessing what the UK has to offer.
From a quality perspective, the UK has plenty of companies with enduring competitive advantages and the ability to make attractive (and importantly sustainable) returns on capital. These businesses can, with patience, deliver compounding free cash flow per share as their returns on capital typically persist at high levels and defy mean reversion. With valuation discipline, this compounding in free cash flow per share can be reflected in total shareholder return over time as well as enabling downside protection.
Figure 3: What do we look for in quality UK companies?
Source: Ninety One, For illustrative purposes only.
From a value perspective, the UK has broad appeal – even leaving aside the current starting point of relatively low valuations, which makes the UK a potentially happy hunting ground for value investors. First, the UK equity market is subject to the same behavioural biases – such as herd behaviour, loss aversion and short horizons – that result in mispricings in every equity market. It also possesses a highly diverse spread of companies, which is important because the location of genuine value changes over time (i.e., it moves across sectors and subsectors). In other words, the UK equity universe has sufficient breadth and depth to allow value investors to go wherever the value happens to be. Value investors should have no trouble building a diverse portfolio that spans the full spectrum of types of value opportunity.
Figure 4: A broad spread of value opportunities
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Closing thoughts
In many ways, the UK could be increasingly viewed as a safer port in stormy waters, with its mixture of well-run domestic businesses and global champions, both of which are trading at relatively low valuations. This atypical combination is a real strength of the UK stock market, which is also facing generally less exogenous complications than some other major equity markets.
However, the broad market backdrop remains very uncertain, with heightened geopolitical tensions and clear risks as the global economy continues to adjust to long established norms around trade and policy being reshaped, all while the cost of borrowing remains high by recent standards. Given this, we think that it makes sense to take an active, selective investment approach to UK equities, seeking to capture alpha rather than relying solely on the market return. For UK equity investors, quality and value are complementary active approaches, likely to result in very different portfolios from each other with differentiated drivers of potential return.
1 As at end-May 2025.
2 Source: AJ Bell
Important Information
This communication is provided for general information only should not be construed as advice.
All the information in is believed to be reliable but may be inaccurate or incomplete. The views are those of the contributor at the time of publication and do not necessary reflect those of Ninety One.
Any opinions stated are honestly held but are not guaranteed and should not be relied upon.
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