CONTRIBUTORS
Ben Russon, CFA
Co-Head, UK Equities
Richard Bullas
Co-Head of UK Equities
Portfolio Manager
Key takeaways
- The FTSE All Share has averaged an annual return of almost 15%1 over the past five years, yet the market remains attractively valued compared to global peers.
- Amid a backdrop of supportive monetary policy and ongoing rate cuts, larger-cap stocks have surprised by outpacing mid and small caps over 2025.
- The UK’s reliable dividend yield and increasing prevalence of share buybacks continue to provide robust shareholder returns, while government initiatives may boost domestic investment and support further market recovery.
Strong year for UK equities
UK equities have been one of the top performers in global equity markets over 2025, with the market providing a return of almost 20%2. This isn’t a one-year phenomenon, the FTSE All Share has returned almost 15% annually for the past five years. Yet, it’s a market that continues to look like good value by any international comparison.
At the larger end of the market, the FTSE 100 with its global powerhouses across banking, healthcare, mining and energy industries, has been charging ahead. The benefit of an internationally exposed market, sterling holding steady and all whilst looking attractively valued has not been overlooked by investors. These companies have continued to demonstrate earnings growth which has been further enhanced by the increasing use of share buybacks by UK-listed companies. And investment performance hasn’t been confined to the larger end of the market. The charge from the FTSE 100 has outpaced mid and small cap stocks but they have both produced positive returns for the year.
Exhibit 1: MSCI UK 12m forward P/E relative to MSCI World
Source: JP Morgan as at 3 Nov. 2025.
Foothills of recovery
The exciting part of the UK’s recent performance is that many of the same past drivers of returns remain true looking forward. Although UK equity markets have had a strong year, ClearBridge believes we are only in the foothills of a market recovery. The economic environment has been ready, like a coiled spring, on the verge of a recovery for a couple of years. Inflation has peaked and should continue to reduce over 2026, real wage growth has offset this pressure, the interest rate cutting cycle has begun, and savings rates are elevated; yet, stuttering confidence and an uncertain political backdrop have been road blocks to a fully-fledged UK resurgence.
Interest rate cuts are normally an early sign the economy is moving towards a domestic recovery. Throughout 2025 the Monetary Policy Committee (MPC) voted for three rate cuts with it finely in the balance if there will be one more at the December MPC meeting. Under this backdrop, based on historic market performance, we would have anticipated mid and smaller cap stocks to outperform large caps. This hasn’t materialized.
Exhibit 2: FTSE 250 Returns After First UK Interest Rate Cut
Source: ClearBridge and Bloomberg as of 31 May 2024. Data is month end index for the month when UK interest rates were first cut. Date range analyzed is 1990-2024 (7 rate cut periods). Past performance is not an indicator or a guarantee of future performance.
On first impressions, the 2025 Autumn Statement is less inflationary and puts less pressure on employers than last year’s disastrous budget. The Office for Budgetary Responsibility (OBR) projects the UK will continue to benefit from falling inflation, which we believe will pave the way for further rate cuts and open the door for an injection of consumer confidence. Elevated levels of aggregate savings in the UK provide a further boost of optimism.
Given many UK companies are not overleveraged, whist continuing to be profitable, management teams have been looking at the best ways to return excess capital to shareholders. The UK market is famous for its reliable dividend culture and UK equities have provided a yield of almost double the global average over 2025. Management teams are also increasingly utilising share buybacks as a good use of excess cash as, whilst valuations remain appealing, share buybacks are a strong management tool in buoying shareholder returns.
Exhibit 3: Percentage of FTSE All Share Index Constituents that Repurchased at Least 1% of their Shares in Each Year
Source: Bloomberg at 28 October 2025.
Exhibit 4: Dividend Yield across the Globe
Source: FactSet as at 11 November 2025.
Valuations
Looking across global equity markets, the UK still looks attractively valued. Especially when compared to US valuations and global allocations, currently trading above their 90th percentile price range. Moreover, international companies and private equity firms continue to target UK companies for acquisition, further reinforcing the value opportunity the UK equity market offers.
Looking across the market capitalisation of the UK market, we believe the largest valuation opportunity lies in mid and small cap companies. Following the significant outperformance of UK large caps and a prolonged period of underperformance for the UK SMid indexes, this have left valuation looking very attractive versus historic ranges and relative to the wider UK market. While macro and domestic pressures are likely to persist, what these discounted valuations miss, in our view, are the underlying qualities and strong fundamentals of some great British businesses, many that have shown prodigious resilience in this period of uncertainty and are poised to reassert their strong fundamentals.
With attractive valuations, resilient corporate fundamentals, robust shareholder returns and a supportive policy backdrop, we believe UK equities are poised to offer compelling opportunities for investors in 2026 and beyond - making now an exciting time to consider allocating to this dynamic and undervalued market.
EndNotes
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Source: FactSet as at 31 October 2025.
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Source: FactSet as at 31 October 2025.
WHAT ARE THE RISKS?
All investments involve risk, including possible loss of principal. The value of investments can go down as well as up, and investors may not get back the full amount invested.
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