In a year marked by tariffs and geopolitical uncertainty, returns of c 15% year-to-date are no mean feat. Both the UK100 and the Euro Stoxx 50 have posted (local currency) gains of 14.9%, outpacing the S&P 500 (14.2%). The US is being driven by one of the most compelling themes of our time: AI, with names such as Nvidia (+40% year-to-date) and Oracle (+72% year-to-date) examples of where investor interest remains. Elevated US valuations and continued concerns about the US growth outlook continue to result in diversification into the European and UK markets, where lower valuations and yield support offer a margin of safety.
The UK’s unloved status may reverse post budget
The UK market offers opportunity. Bank of America’s September 2025 poll showed UK equities as ‘the most unloved assets right now’, with a 20% net underweight position. This 18% swing from the August 2025 from 2% net underweight was the largest change since 2004 and is now more underweight than after the Brexit vote. Jitters ahead of Rachel Reeves’ budget and a more stubborn inflation read in the UK have meant fund flows are going to Germany, Italy and Spain. We believe this is likely to reverse in the coming quarter for three reasons: (1) the German fiscal trade we saw in Q125 is in our view moving out of the honeymoon phase into reality and is yet to translate meaningfully into German corporate profits, making the UK relatively more attractive, (2) as with the last budget, we think the government has little leeway for anything drastic, providing scope for a relief rally (we have a webinar with Gervais Williams on 27 November to review the impact) and (3) the market expects the US dollar to weaken further, and this could refocus attention on domestic UK companies where profits are insulated from US dollar weakness; the UK250 has notably lagged the UK100 in the year to date.
Four themes we consider likely to attract new capital
The equities rally has been notable for the low volatility that has accompanied it, particularly given the backdrop of tariffs and geopolitical uncertainty. We consider the following themes likely to attract new capital, assuming volatility normalises:
- Large-cap defensives: flight to quality – consumer staples such as Imperial Brands, BAT and Diageo, utilities including National Grid and Centrica, healthcare names GSK and AstraZeneca and services like Compass Group offer 3–5% yields with defensive earnings and balance sheet strength.
- Financials: yield curve plus capital returns – banks including Barclays, HSBC, Lloyds and Standard Chartered benefit from steeper curves and are returning significant capital while trading at 6–9x forward P/E ratios and 40–50% below consensus target prices, despite operational improvements.
- Early cyclicals: UK consumer recovery – building materials (Forterra, Ibstock), home improvement retail (Wickes, DFS, Dunelm), electronics (Currys) and contractors (Galliford Try, Kier, Morgan Sindall) offer upside potential, as housing and consumer spending recover, with private equity’s avoidance of turnarounds creating public market opportunities.
- Defence: structural growth – BAE Systems (£77.8bn backlog, up 25% over 12 months), Rolls-Royce and Melrose/GKN benefit from multi-year European rearmament programmes, providing government-backed revenue visibility with reduced cyclical risk.
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