The UK stock market is often stereotyped as home to unexciting, traditional businesses overshadowed by the star tech companies in the US. It’s a view that has steered investors away, not helped by the rise of passive investing.
Tracker funds have seen the lion’s share of investors’ inflows with many of them taking a global or US-centric approach, and given the UK represents just 4% of the global market, that wall of money largely went elsewhere.
Combined with a slump in valuations for UK companies – owing to negative sentiment around the UK economic and political climate – it has been something of a perfect storm.
Yet, the tide has perhaps started to turn. With less certainty around the exceptionalism of the US market as President Trump’s uneven trade policies roll out, investors have started to consider other markets more closely. We think the UK stands out as good value.
How has investment in the UK performed recently?
Perhaps surprisingly to many people, it has been lucrative to be a contrarian and back UK shares in recent months. The broader FTSE All Share index (which is primarily made up of the FTSE 100 and the FTSE 250 index of medium-sized companies) is up 13.3% with dividends reinvested in 2025 to date, which beats the S&P 500 return of 8.9% also with dividends reinvested. For UK investors the differential is even greater owing to weakness in the US dollar. The S&P 500 is only up 2.3% in sterling terms. Source for data: FE Analytics to 30/07/2025.
It’s true there are some still significant headwinds. Some of the highest prices for energy in the developed world makes it difficult for heavy industry to compete. Plus, with the nation’s finances on a shaky footing and a lack of political will to cut spending, additional taxes are likely. This could hit business activity further and damage consumer confidence.
Can investing in the FTSE be worth it despite the UK’s economic problems?
In the short term, interest towards UK equities has picked up as a triplet of trade deals – with the US, India and the EU – looks poised to improve the growth environment. Markets have also been pricing in a series of interest rate cuts from the Bank of England which could reduce the pressure on borrowers and help propel spending and growth.
UK consumers in aggregate still have a decent war chest of savings and an any upturn in confidence could provide a boost for consumption and for domestically orientated businesses.
It’s also important to keep in mind that the UK stock market, as represented by its publicly-traded companies, is not the same as the UK economy. It is truly international. A large majority – about three quarters – of FTSE 100 UK company earnings come from overseas. A glance at the UK’s largest stock market listed business demonstrates that for many of the largest companies listed on the London Stock Exchange, the trajectory of the domestic economy matters little. Their footprint is truly global.
The UK’s largest listed FTSE 100 companies and their percentage of the index
| Company | Weight in FTSE 100 | Sector and description |
| Shell | 8.1% | Energy company involved in oil and natural gas exploration, production and refining, as well as renewable energy. |
| AstraZeneca | 8.0% | Pharmaceutical company focused on the discovery, development, and commercialisation of prescription medicines. |
| HSBC | 7.4% | One of the world’s largest banking and financial services organisations. |
| Unilever | 5.3% | Multinational producing fast-moving consumer goods spanning beauty, personal care, home care and foods. |
| RELX | 3.4% | Global provider of information-based analytics and decision tools for professional and business customers. |
| BP | 3.3% | Energy company engaged in oil and gas production, refining, and marketing, as well as renewable energy. |
| Rolls-Royce | 3.0% | Designs, manufactures, and services power systems for aviation, marine, and energy sectors. |
| British American Tobacco | 3.0% | Global tobacco company producing cigarettes, e-cigarettes, heated tobacco, and nicotine pouches. |
| GSK | 2.8% | Pharmaceutical company focused on developing vaccines, speciality medicines and general medicines. |
| BAE Systems | 2.2% | A global defence, aerospace, and security company. |
| 46.5% |
Source: LSE 31st March 2025
Find out more: How to invest in the FTSE 100
Dividends, buybacks and M&A
Some of the most favourable trends in the UK market are obscured from view. While the index has struggled to make progress in capital terms over the past decade, it has been an engine of consistent income generation. With shares still relatively cheap – a more than 40% discount to US markets when measured by the price-to-earnings ratio – a good dividend yield is available and could help underpin valuations.
On top of dividends, UK businesses are executing a high level of share buybacks. These involve using earnings to reduce the share of the pie held by investors. When carried out below the company’s ‘true value’, the process can magnify shareholder returns, complementing income generated through dividends.
Taking into account both dividends and buybacks, the UK market boasts a combined ‘yield’ accruing to shareholders of well over 5%, which compares to just over 4% for European stocks and less than 3% for US stocks.
The cheapness of stocks listed in the UK has also resulted a flurry of takeover offers for UK firms from both corporate and UK equity buyers, which looks set to continue. This merger and acquisition (M&A) activity creates a halo effect, reinvigorating interest in certain sectors and the market more broadly.
With these tailwinds and valuations still at undemanding levels in an historical context and in relation to other markets, investors armed with a disciplined strategy have a fine hunting ground to achieve strong returns. Here’s two ideas for investors wishing to build up their UK exposure – one fund and one investment trust.
Please note, these should be considered long term investments meaning five years plus. They are provided for your information but are not a guide to how you should invest. Before investing in any fund please read the relevant Key Investor Information Document or Key Information Document, and Prospectus to ensure they meet with your objectives and risk appetite.
Temple Bar investment trust
One investment trust aiming to make the most of opportunities in the UK market is Temple Bar managed by Ian Lance and Nick Purves of Redwheel Asset Management. The managers adopt a disciplined approach targeting businesses offering a combination of attractive valuations, strong cash generation, and sustainable dividend growth.
Presently the managers find compelling value in financials, retailers and airlines, highlighting they often like to explore areas of the market others fear to tread. We admire the uncompromising style of the experienced management duo and the high conviction approach of targeting a small list of companies, typically around 30, though this does also add to the risk. They can also invest overseas with up to 30% of the portfolio if short of compelling ideas in the UK market.
The Trust’s focus on undervalued opportunities with strong recovery potential provides the prospect of an attractive growing income for investors on top of some capital appreciation over time. At the time of writing the Trust yields 3.2%, a little lower than the FTSE 100 dividend yield of 3.3%. All yields are variable and not guaranteed.
Investors should note the additional volatility when buying investment trusts as they trade on a live exchange. There’s also some modest gearing (borrowing to invest) which further serves to increase the risk of the underlying portfolio and can lead to higher volatility than an equivalent fund.
WS Gresham House UK Smaller Companies
With high-quality UK small and medium-sized companies are trading at undemanding levels, exposure to this higher risk area is a worthwhile consideration for investors happy to take a more adventurous approach and invest outside the larger, more well-known names.
One option is WS Gresham House UK Smaller Companies run by managers that are highly respected investors in both market-listed companies and private businesses. This crossover means they apply a private equity perspective to public markets, focusing on high quality businesses that have strong management, market positioning and business models. They also consider the potential strategic value of the business to potential trade or private equity buyers, and the fund could continue to benefit from heightened M&A activity.
The managers, led by the experienced Ken Wotton, take a hands-on approach, engaging directly with management to provide input into strategic decisions to help maximise shareholder value. In particular, they are attracted to businesses with high and sustainable margins, strong cash generation and a good record of investing for growth. The process leads to avoidance of companies in financial distress, deep turnaround situations, or those in challenged sectors.
A focus on higher quality businesses with exposure to structural growth themes leads to heavy exposure to sectors such as healthcare, business services, media, and technology. The fund has a concentrated portfolio, typically of 40 to 50 holdings, which adds to the risk of an already more adventurous area and means that the fund is more reliant on successful stock picking.
Nothing on this website should be construed as personal advice based on your circumstances. No news or research item is a personal recommendation to deal.
How to invest in the FTSE 100
Read now
