Will the UK continue to be unloved?

The UK stock market has been largely out of favour with investors since the global financial crisis. A combination of factors; the bias towards value and defensive sectors such as miners and utilities, a lack of exposure to technology companies, as well as political difficulties like Brexit, have all contributed to its ‘unloved’ status.

More recently performance has improved and in 2024 it delivered double digit returns similar to other developed markets with the exception of the US. However, the malaise which has weighed on the UK for so many years’ means that it’s stock market now accounts for just 3% of global equities making it less relevant to international investors.  

The Autumn Budget delivered by Chancellor Rachel Reeves in October 2024 raised spending (and will raise borrowing) with most of the new investment being front loaded over the next two years. This should support growth in 2025, however the challenge to this is taxes have risen to pay for part of it. While the government didn’t raise personal taxes directly, the hike in employers’ national insurance is likely to impact businesses.

The increase in minimum wage combined with the cost of labour for companies will likely either be passed onto the customer, through higher prices or absorbed by the business, reducing profits. Some areas will be affected more than others, for example the services sector, particularly bars and restaurants which employ a lot of staff on minimum wage, will be more affected. Growth is expected to pick up slightly in 2025 with the Office for Budget Responsibility forecasting 1.4% Gross Domestic Product growth in 2025.¹

One characteristic of the UK stock market is it has an international bias. Most of the large businesses that are listed in the UK are global in nature with around two thirds of revenue of the UK’s 100 largest listed companies coming from overseas².

This means the economic outlook for the UK is less relevant for the performance of these businesses and it is the outlook for countries like the US and the broader global economy that can impact profits. The global economy is expected to grow 2.7%³ in 2025.

While UK companies can profit from stronger global growth, their share prices continue to be impacted by global investors sentiment towards the country, which has not improved.

UK stock market valuations have recovered from the lows that followed Liz Truss’ short premiership and the market now trades just below its long term average. More importantly the UK continues to experience a discount to the rest of the world, as the chart below shows, and remains cheap relative to its peers. 

However, this means there are some exceptional UK businesses that are trading at discounts to their international peers, which presents a potential opportunity. In addition, the UK market continues to offer an attractive dividend yield, which is much higher than its peers. The UK market (MSCI UK) offers a yield of 3.7% versus 1.8% for global equities (MSCI All Countries World Index)³.  

M&A activity is also often cited as a potential opportunity as international investors snap up good businesses at attractive prices. 

The UK’s discount to its peers provides some support to its long-term outlook with the higher dividend yield the main driver for our long-term expectations.  However, in the near term there remains some scepticism around the UK stock market and the malaise that has weighed on sentiment to the region has yet to be lifted.

Initial hope that the incoming Labour government would be an opportunity for fresh start has given way to concerns over the impact the 2024 budget will have on the economy, which impacts investor sentiment toward the UK.

If you have any questions about investing in the UK, please contact your usual Evelyn Partners adviser, book a complimentary consultation online or call us 0207 189 2400.

1. OBR.uk; Office for Budget Responsibility - Economic and fiscal outlook, November 2023
2. LSEG Datastream/Evelyn Partners
3. Goldmansachs.com; The global economy is forecast to grow solidly in 2025 despite trade uncertainty, November 2024