UK equities 2025 outlook: What’s on the horizon?

Key takeaways

• Valuation opportunities: UK equities are undervalued, offering attractive dividends and buybacks.
• Economic resilience: The UK economy shows resilience despite challenges, with strong companies navigating inflation.
• Domestic resurgence: Expected growth in domestic activity driven by higher disposable incomes and consumer confidence.
• Our key concerns: inflationary risks, monetary policy, growth, domestic resurgence and valuations.

UK Equities are an exceptional opportunity for investors

This currently unloved asset class is trading at historically (and internationally) low valuations whilst offering access to a diverse range of interesting companies benefiting from an underappreciated UK economic strength. 

And let’s not forget an average dividend yield of almost 4% with share buybacks adding another 2% to returns¹. Interesting, right?

In late 2023, we saw strong returns start to gather pace, but these began to stutter and halt in late Summer 2024 as gloomy government rhetoric and increasing uncertainty around the impact of the Autumn budget hit markets. 

Markets are now back moving on economic data; each inflation release, Purchasing Managers’ Index (PMI) data update, and confidence survey, will be pored over by the market until it’s clear how the UK economy is fairing under its new leadership. 

We remain positive that the UK economy is in much better shape than it’s given credit for and remain focused on finding the best opportunities at a stock level. After all, company fundamentals are what matter and will drive returns over the long term.

Five considerations for UK Equity investors:

1. Inflationary risks

Inflation appeared to be coming back in line until the budget threw a spanner in the works. However, we believe well-run companies are more than capable of navigating an increasing cost base in 2025.

£24 billion pounds of National Insurance costs and a 6.7% increase in the minimum wage will certainly be felt by UK plc. Companies weren’t planning for this, and many will need time to adopt a strategy to mitigate this cost.

Well-run companies, with experienced quality management teams, have been through harder times and are ready to manage the implications of the budget. They maintain levers to manage cost increases, especially those companies with strong balance sheets and financial management discipline. Having spoken to many portfolio holdings in the weeks following the budget, they are quietly confident they can mitigate the increases through price rises and other efficiency measures.

2. Monetary policy

Interest rates are forecast to fall, it’s just a case of how fast and how far. This is supportive of strength in the more domestically focused areas of the UK market in the years ahead.

The Bank of England has clearly expressed its preference for a slow and steady approach to loosening monetary policy, keeping an eye on what inflation does. The budget did change things, but this isn’t a repeat of the 2022 Truss-Kwarteng mini-budget.

The yield curve was nudged upwards as the market digested the budget’s inflationary aspects, introducing further caution to the Bank’s outlook and the anticipation of a slower pace of rate cuts.

We assume some costs will be inflationary, but companies will also need to find savings elsewhere, likely via productivity and efficiency gains, limiting future wage growth and reducing workforces.

This could lead to interest rates needing to be reduced faster than anticipated to promote employment and further growth, something that would be supportive for UK equity valuations. It could be a case of bad news is good news for interest rates.

3. Growth

The world has a striking habit of underestimating the UK. In the run up to the budget both the International Monetary Fund (IMF) and Organisation for Economic Co-operation and Development (OECD) upgraded their growth forecasts which now show the UK as one of the fastest growing economies in the G7, ahead of the eurozone but behind the US.

Yes, the recent budget has slightly muted the medium-term growth forecast. However, growth is still very much the direction of travel, one which we believe will be further supported by monetary policy decisions. High quality companies with strong balance sheets can prosper under these economic conditions.

4. Domestic resurgence

A domestic resurgence is on the cards, the question remains one of confidence. The new Labour government's pessimistic messaging briefly reversed the upwards trend in consumer confidence. Those that could spend held back, leading to a precautionary increase in the UK savings ratio, with high interest rates further growing savers’ pots of money.

The thing is, the economy is growing and even if inflation ticks up, we’re not heading towards another cost-of-living crisis. Disposable incomes are creeping upwards too – most obviously for the two million people on the minimum wage² who are due to receive a 6.7% increase in 2025, hot on the heels of a 9.8% increase in 2024.

What will consumers do next? Keep saving in the face of falling base rates or will they begin spending more? This is something we will be watching closely as 2025 unfolds but we feel the domestic resurgence is ready to take flight.

5. Valuations

UK Equities offer exceptional value to investors. The market is undervalued by historical and international standards, with its return potential further buoyed by attractive dividend yields and share buybacks. The million-pound question is when will the market re-rate? That we cannot predict. What we do know is that the UK stock market offers incredible value; those who are invested when it finally re-rates could be richly rewarded.

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