UK equities are at a fascinating inflection point, with UK stocks trading at their steepest discount to global peers in more than three decades. After 41 consecutive months of outflows, UK equities saw their first net inflows in November 2024, potentially signalling a shift in investor sentiment.
Key overall themes
• UK equities trading at a 40% discount to global peers.
• US market dominance reaching unprecedented levels (70% of global indices).
• Growing interest from US-based funds seeking diversification.
• Increasing corporate activity validating UK valuations.
• Pension fund reform potentially creating significant buying pressure.
Core insights
• Valuation disconnect: UK market trades at 10.5x forward P/E versus 26x for US market.
• Economic resilience: UK projected as third fastest-growing G7 economy in 2025 (1.7% growth).
• Structural shifts: end of zero interest rate policy may favour UK market characteristics.
• Corporate activity: significant uptick in M&A activity, with deal volumes up 81% compared to 2023.
• Growing acceptance of share buybacks among UK companies, following US model.
Selected companies – notable mentions include:
• Renew Holdings: specialist engineering group focused on critical UK infrastructure maintenance, with record FY24 results and strong exposure to structural tailwinds.
• Rightmove: market-leading property portal with 80% share.
• Card Factory: geographic expansion through franchise model.
• Gamma Communications: strong position in mature markets.
• ME Group International: high returns on capital in niche markets.
We profile 20 companies and nine closed-end funds that provide exposure to UK equities.
Conclusions: The report suggests UK equities represent a potential ‘generational opportunity’ based on:
• Historically low valuations offering significant margin of safety.
• Improving economic fundamentals.
• Multiple potential catalysts including pension reform.
• Growing international interest.
• Increasing corporate activity validating valuations.
The report recommends a ‘barbell approach’ – maintaining selected US exposure while building positions in UK equities, particularly in the small- and mid-cap space where valuation disconnects are most extreme.
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