Joanne Benson, Head of Investments Copia Capital

After a turbulent few years, UK equities are looking more attractive than ever. Valuations for UK stocks, especially in the small and mid-cap space, are at historic lows. In addition, a surge in share buybacks and mergers and acquisitions (M&A) alongside a new government that appears to be increasingly focused on supporting investment puts the UK market in a good position for a resurgence. So, is it time for investors to take another look at the UK?

Low valuations

Currently, the UK stock market is trading at some of the lowest valuation multiples of any major region. Years of economic uncertainty, post-Brexit changes, and lack of investor confidence have all played a role in keeping prices down. But the upside to this is these low valuations create a great entry point for those investors willing to take a long-term view.

Small and mid-cap stocks, which often feel the effects of economic swings more sharply, have been hit particularly hard. But compared to their historical averages and global peers, they’re looking relatively undervalued.

Record share buybacks

UK equities ended 2024 with a solid gain of nearly 10%.¹ Attractive valuations and strong merger and acquisition activity offered some optimism, suggesting potential growth in the near future. Notably, the first positive inflows into UK equities in years, seen in November 2024, point to a slow but steady shift in investor sentiment towards the region.

One of the strongest signs of confidence in UK equities is coming straight from companies themselves. UK firms are buying back their own shares at record levels which appears a clear signal that they see their stock as undervalued and worth reinvesting in. Not only does this show faith in their future, but it also helps support share prices and boost investor sentiment over time.

Increased M&A

M&A activity has surged, with bids for UK companies occurring frequently and reflecting growing confidence in the market’s prospects. More corporations are taking advantage of low valuations – they made up 70% of all M&A activity last year,² showing that that companies are seeing the strong cash flow of many UK-listed businesses and the attractive valuations available.

These deals reinforce the idea that UK assets are seen as valuable by strategic and financial buyers. For investors, that could mean potential gains from takeovers and consolidations, another reason to keep a closer eye on the UK market.

Increase in government support

The Labour government has increasingly talked about supporting investment and economic growth over the past few months, although nothing concrete has yet emerged.

Several initiatives have been outlined, including encouraging investment in productive assets (such as pension reforms which could help direct more capital into UK businesses), small business growth initiatives that aims to cut red tape and lower costs for smaller firms, and industrial strategy commitments, such as the Invest 2035 which is designed to drive long-term economic growth and strengthen UK industry.

While we’re yet to see major policy shifts, the growing focus on investment-friendly measures could give UK equities an extra boost in the coming years.

Economic resilience and prospect for growth

The UK economy has shown resilience over the past few years, outpacing both the US and the eurozone in growth during 2024. The International Monetary Fund (IMF) has adjusted its forecast accordingly, anticipating the UK economy to grow by 1.6% in 2025.³

With inflation continuing to ease and the potential for further interest rate cuts, we could at last see a rise in consumer confidence, paving the way for a period of economic growth in several sectors within the UK market. The housebuilding industry, for instance, stands to benefit from declining inflation, potential interest rate cuts, and supportive government policies aimed at increasing housing supply.

Uncertainty from the US

Tempering the positive signals is the fact that Donald Trump has not yet made it clear whether he will impose trade tariffs on the UK. Even if it is not directly targeted, Trump continuing with the implementation of trade policies he has threatened elsewhere, could have negative repercussions on the UK.

Such action could result in the UK feeling the effects through slower growth among key trading partners, an influx of industrial exports diverted from the US, and potential disruptions in financial markets, including higher borrowing costs. An economic slowdown – especially in the EU which accounts for around half of the UK’s trade – could further dampen any growth prospects. If important trading partners fall into recession due to tariffs, they may cut interest rates and experience currency depreciation, making British exports more expensive.

For investors willing to take a long-term perspective, there are compelling opportunities within UK equities, particularly in small and mid-cap stocks. However, global uncertainties remain, so, as always, diversification is crucial to mitigate risk while seeking to take advantage of the potential UK recovery.

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Sources:
1 https://copia-capital.co.uk/cappuccino-commentary-41/
2 https://www.wealthtime.com/advisers/blog/market-update-economic-activity-continues-a-steady-progress/
3 https://commonslibrary.parliament.uk/research-briefings/sn02784/