Where next for UK equities?

Key takeaways:

• The FTSE 100 benefits from sectors like banking, healthcare, mining, and energy, with about 75% of earnings from overseas², offering global market access at a discount compared to the MSCI World index.  
• Negative investment flows have put downwards pressure on UK equity valuations but growing global uncertainty could draw investors back to the UK, attracted by its dividend culture and increasing use of share buybacks supporting prices. 
• The UK savings ratio is above normal levels, opening the doors for increased consumer spending if confidence improves, supported by possible interest rate cuts or clearer taxation plans.

The FTSE 100 Index soared past the 9,000 mark for the first time ever in July, proving the doubters wrong and showcasing the strength of the UK market. UK equities are delivering real value; over the last five years to 30 September 2025, investors in UK equities have enjoyed an impressive average total return of 13% per year (FTSE All Share Index)¹ — clear evidence that the United Kingdom remains a smart choice for long-term investment.  Yet, despite this strong period of performance, it’s still undervalued by an international comparison. 

As the UK’s most internationally exposed index, the FTSE 100 draws on the power of banking, healthcare, mining, and energy sectors - offering a window into global opportunity. Around 75% of the FTSE 100 earnings are from overseas sales²; however, the MSCI UK trades on a 35% valuation discount to MSCI World³. This means you can access international markets at a very significant discount via the UK. Furthermore, there are many interesting opportunities to be found in small- and mid-cap UK stocks, where quality stocks are trading at discount prices following five years of prices lagging the blue-chip stocks. The UK market is certainly worth sitting up and taking a look.

So, what’s driving UK share prices and keeping valuations low? A key driver has been negative investment flows.   Long gone are the days of the 90s when UK insurance companies and pension funds had large domestic allocations.  Increasing investments in global equities, particularly with high exposure to the glitzier US market have led to an exodus of UK money.  This has only been compounded by de-risking of defined benefit schemes.   However, are we at a turning point for UK equities? Increasing global uncertainty is making people question their asset allocations and look for pockets of value. Furthermore, there are market factors supporting UK returns. The UK’s reliable dividend culture is currently being further backed up by companies increasingly directing their excess cash to share buybacks, supporting share prices.

However, some may point to their concerns about the UK domestic outlook, particularly due to inflated government borrowing costs and ahead of the autumn budget. In 2024, the Labour Government’s inaugural budget resulted in the largest post-war tax increase, with businesses absorbing most of the impact. At Labour’s recent annual conference, Prime Minister Keir Starmer declared economic growth the “defining mission” of his government, linking it directly to national renewal and social cohesion. While Chancellor Reeves reaffirmed Labour’s commitment to fiscal responsibility, she stated that she would take “no risks” with public finances. It remains to be seen to what extent these two objectives can be achieved with an increasingly vocal left-wing element of the party making their case for further spending.

Yet, the government isn’t the full picture when you look to UK equity investment. Moving back to the fundamental UK economy, it is continuing to expand, demonstrating 1.4% growth in the second quarter year on year⁴.  As has been our view for some time, the fundamentals supporting the UK economy and consumer remain intact and should provide a tailwind to growth over the medium term. The saving ratio is currently at 10.7 %⁵, which is above its long-term average and more than double the current US savings rate of only 4.6%⁶. As a consumer-led economy, this matters. The question is, what will unleash the spending power of the UK economy - perhaps more interest-rate cuts or more clarity on the government’s taxation plans? Whatever the solution, if confidence improves and that spending power is unlocked, it will be a big boost to the economy. 

As global uncertainty begins to recede and UK listed companies continue to demonstrate resilience, this may be an exciting time to consider investing in the UK's diverse range of sectors.