UK equities: Not wrong to call them, but Europe surprised

UK equities have seen modest gains amid global volatility, outperforming the US market but lagging European counterparts. With continued outflows, despite performance improvements, the UK market presents both challenges and opportunities for strategic investors.

Key overall themes

• UK All Share is up 2.8% year-to-date, while the S&P 500 has fallen c 6%.
• German DAX surged 13% since January, outpacing UK gains.
• Defensive stocks and large-cap stocks are seeing increased demand.
• Driving performance in early cyclicals and financials.
• Trump tariff concerns and German defence spending is reshaping investment landscape.

Core insights

• Political dynamics: Trump policies and Germany’s defence spending shift.
• Valuation opportunity: UK remains one of the cheapest markets globally despite outperformance.
• Corporate activity: 13 bids announced since January, with buybacks providing market support.
• Persistent outflows: February saw £1.2bn withdrawn from UK-focused funds despite positive performance.
• Sector rotation: defence, large-cap defensives and early cyclicals gaining momentum.

Featured companies

• Accsys Technologies, a sustainable building materials innovator targeting 14% CAGR with improving margins.
• BAE Systems, which is positioned to capitalise on increasing European defence budgets with record £77.8bn order backlog.
• New companies joining our showcase list include Compass Group, Centrica and Telecom Plus.
• Notable exits from the core list include Dowlais Group (received takeover bid), Gamma Communications and Renew Holdings.

Conclusions

The report highlights that despite continued institutional outflows, UK equities offer compelling value with multiple potential catalysts:

• Ongoing discount to global peers providing margin of safety
• Defensive qualities attractive in current geopolitical climate
• Corporate activity validating underlying valuations
• Sector-specific opportunities in defence and early cyclicals

Our 20-company showcase list reflects shifting market priorities, with increased focus on defensive large-cap companies and beneficiaries of rising defence spending.

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