The global economic landscape remains uncertain, with uncertainty around the Trump presidency sparking fears of tariffs, higher inflation, and stagnation. The early 2025 spike in global bond yields added to market pressures, but within this volatility, UK large-cap equities remained a source of stability.
While stagflation - slowing growth and persistent inflation - looms as a risk, there’s a paradox at play. A weaker global economic outlook could actually bring inflation down, giving the Bank of England room to cut interest rates. While rate cuts may provide a stronger boost for smaller, domestically focused companies, they could also support UK large caps through improved market sentiment and lower discount rates.
In this environment, a stronger US dollar would be a tailwind for many UK large-cap companies, which generate around 80% of their revenues from overseas markets. This global exposure is a key reason why the FTSE 100 has historically remained resilient in times of uncertainty over the UK economy.
The index also leans defensive, with strong representation from essential industries such as pharmaceuticals, food, and beverages - sectors that maintain steady demand regardless of economic conditions.
Commodities play a crucial role as well. Oil, gas, and mining stocks can benefit in inflationary times, while banks have capitalised on rising interest rates. These sectors have helped the FTSE 100 outperform during such backdrops.
You don’t need to look very far to be confronted with negative headlines and stories of broken Britain. But, maybe it’s time to change the narrative, take a closer look and discover the real story on UK equities.
Even amid ongoing macro uncertainty, certain areas within UK large caps present compelling opportunities. Take consumer staples, for example - companies like Unilever are sharpening their focus on efficiency and growth, leveraging their strong brands. The defensive nature of household goods ensures a degree of earnings stability, even in volatile times.
Looking at the tobacco sector, despite long-term volume declines, it is still seeing steady profit growth. This is thanks to pricing gains, global population growth and expansion into non-tobacco nicotine categories such as vaping. Banks, too, are seeing a benefit as we move away from the era of very low interest rates. This means institutions like Barclays are seeing stronger performance, allowing for substantial cash returns to shareholders.
Then there’s the UK consumer. With savings ratios at an elevated level, months of real wage growth and the prospect of further rate cuts, the consumer might loosen their purse strings to the benefit of UK-focused retailers, but also to the wider UK economy.
Despite the strengths of UK large caps, investors have favoured other equity markets globally, particularly the US and the high-flying Magnificent 7 tech stocks. But what could draw capital back to UK large caps? One potential driver is pension reform.
Possible government changes could encourage investment to be channelled back into the UK economy to help boost growth. UK pension funds and insurance companies were once major holders of domestic equities, owning over 50% of the market in the 1990s - a figure that has since fallen below 5%. A reform here could help reverse years of outflows and support a long-awaited re-rating of UK equities.
While uncertainty persists, the UK large-cap market continues to offer a compelling mix of defensive earnings, global exposure, and potential structural tailwinds. We believe UK equities could see renewed investor interest, setting the stage for a stronger 2025 and beyond.
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