From undervalued to unmissable: Investing in the UK's revival

The UK has been a gloomy place to manage long equity money in recent years, with outflows becoming the norm. This weak sentiment has been understandable. In 2016, the UK narrowly voted 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 becoming safer harbour amid stormy global waters, especially in an era of heightened political risk, investors stand to gain significantly. 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.Tom Peberdy, Managing Director, UK Client Group: “The UK has gone from being one of the world’s most unloved markets to one of its most compelling opportunities. Investors are waking up to the disconnect between sentiment and fundamentals—and those willing to look through the noise stand to benefit meaningfully”.

Time to reconsider

Despite often negative headlines, there are reasons to be positive about the UK. May’s interest rate cut—the fourth by the BoE since summer 2024—follows a sharp decline in inflation from its October 2022 peak. While growth has been modest, the UK has also avoided a recession and showed encouraging signs, including 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.

UK equity markets offer a compelling entry point. While 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 – remains 10% below its 2021 peak. Valuations across UK companies remain attractive, partly due to sustained selling pressure from active funds facing macro-driven outflows. Anna Farmbrough, UK Quality Portfolio Manager: “Crucially, the UK market offers a powerful blend: high-quality, undervalued domestic firms alongside global leaders trading at discounts to international peers. This creates fertile ground for building diversified, value-rich portfolios.”

Further strengthening the case, UK companies are leading globally in share buybacks and continue to reward investors with some of the most generous dividends in the developed world. (see Figure 1). Additionally, UK companies continue to return cash to shareholders with particularly generous dividends relative to most other advanced economies.

Figure 1: 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, the UK offers a rare trifecta: 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.

Ben Needham, UK Quality Portfolio Manager: “And we’re not alone in recognising the UK’s growing appeal. Last year, five FTSE 100 and 19 FTSE 250 companies attracted takeover bids—most successfully. The average deal size surged to £1.07 billion, nearly triple the £390 million average in 2023. In total, £49 billion in recommended bids were made, up sharply from £17.2 billion the year before. This wave of corporate interest underscores the deep value international buyers are seeing across the UK market.”

How to access the UK market

UK equities offer exposure to a diverse range of businesses at attractive valuations relative to the US and some other markets. 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. AJ Bell is a successful disruptor in a growing UK savings market. Additionally, founder-led pub operator JD Wetherspoon reinvests in pricing every year to keep costs down for its clients. 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.

The UK remains attractive for value investors—not just because of relatively low valuations, but due to the market’s breadth, depth, and behavioural inefficiencies that create mispricings. Its diverse mix of sectors means opportunities shift over time, rewarding flexible, fundamentals-based investors. Take Jet2: despite heavy pressure on the travel sector during COVID, its end-to-end control of the customer journey enabled it to gain market share and emerge stronger. The market has reflected that resilience in its share price.

Alessandro Dicorrado, Portfolio Manager, Head of Value: “The UK is home to a rare blend of high-quality domestic businesses and global leaders, many of which are trading at appealing valuations. These have recently been supplemented by improving fundamentals and more disciplined capital allocation. The stability of some of the country’s large businesses, be it in consumer staples, pharma or retail, offers investors defensive exposures at attractive valuations, as opposed to the premiums that one normally is required to pay for this return profile.”

Still, uncertainty remains elevated. Geopolitical tensions, shifting trade dynamics, and persistently high borrowing costs demand caution. In this environment, a passive approach won’t cut it. An active approach is essential—targeting alpha through quality and value, two distinct yet complementary styles that offer diverse and uncorrelated return potential within UK equities.

1. As of June 2025