A guide to navigating the UK market

With a keen eye for spotting overlooked opportunities, seasoned financial journalist David Stevenson turns his attention to the UK equity market – a corner of global finance often overshadowed by the glamour of Wall Street. In this piece, he explores why, despite its modest share of global indices, the UK market deserves a closer look.

Investors get terribly excited about US equities and ignore the home-grown champions. The UK equity market is varied and can be good value, and worth a closer inspection. However, you need to tread on home ground with some caution: cheap isn’t always the best.

Let’s start with a bit of trivia. Was the Stock Exchange in London the only stock exchange in the UK over the last couple of hundred years? You might have guessed by the nature of the question that the answer is no. In years past, the UK was dotted with regional stock exchanges, including Liverpool, Manchester, and Scotland (four until the 1960s). They’ve all fallen by the wayside because of the relentless process of globalisation in financial markets.

Talk to the cynics and they reckon that even the London Stock Exchange, the LSE, could go the way of its regional peers as everything seems to revolve around the US. A long list of low points has been notched up for the London market of late, of which the latest is the sorry state of London-based initial public offerings: in the first half of 2025 there were just 9 IPOs in the London market raising a meagre £182m according to analysis by law firm White & Case LLP of the latest London Stock Exchange data.

The cynics are, of course, overdoing it: the London market and its key benchmark indices are still very much alive and kicking. Take the FTSE 100 index, for instance, which tracks the 100 largest stocks listed on the London exchange by market capitalisation. It recently surpassed 9,000 index points. According to fund manager Martin Currie, “With a 9% capital return this year and a robust 4% dividend yield, UK equities are delivering real value. Over the last five years to 30 June 2025, investors have enjoyed an impressive average total return of 11.3% per year – clear evidence that the UK remains a smart choice for long-term growth.”

Sadly, what is indisputably true is that on a global scale, UK equities are less and less systematically important. In previous decades, UK equities have comprised as much as 10% of the total value of global equity benchmark indices, whereas now that number is in the low single digits.

Currently, the UK comprises just 3.5% of the total value of the MSCI World index of developed world markets. Now, before you throw your hands up in the air and say we’re doomed (again), bear in mind that that 3.5% is not that far off Japan and is more than France, Germany or any other developed world market. So, the UK is small fry, but it’s not negligible. 

In this article, we’ll look at why local investing, in UK-listed equities, is worth further investigation. In sum, there are four arguments. The first is that there’s a lot of variety, especially when we look at the different indices commonly used as benchmarks.

Next, the UK market is relatively inexpensive compared to many other markets, possibly for good reason. The UK market also encompasses a diverse range of businesses and sectors that serve as valuable proxies for the global economy.

Lastly, the UK market has more than its fair share of stocks that might appeal to investors considering different strategies, such as equity income investing or small-cap growth stocks.

Before we explore each of these points, I want to make two crucial observations. The first is don’t lazily assume that investing in, say, an FTSE 100 equity fund means you’re investing in the UK economy. You’re not – it’s an index of globally diversified stocks that derives most of its revenue in dollars from international sales. The FTSE 100 is not a barometer for the health of the UK economy and nor frankly is the FTSE 250. 

The second point to make is that too many investors suffer from a UK sterling bias. They may not be proactively seeking out overexposure to the UK, its stocks, and its economy, but they end up with assets that are massively overexposed to the UK. Your house, a key asset, is clearly UK-based, as are most of the businesses we work in. You have lots of sterling-based assets, and perhaps a lot of sterling-based cash or bonds. Even at the level of stock portfolios, numerous studies have shown that many UK investors are overexposed to the UK because they research stocks they are familiar with, deal with on a daily basis, and are already knowledgeable about. There’s nothing wrong with that, and as we will see, UK equities are great value.

But when thinking through your UK exposure, think more generally about your overall UK exposure across all assets and work out whether you need more – or less – UK equity exposure. Perhaps if you are nearing retirement and need to focus on stable income streams, overexposure to the UK makes absolute sense. Whatever your situation, though, don’t fall into the trap of being overinvested in the UK just because it’s easy.

What to invest in – the benchmarks

With those two caveats above out of the way, let’s start by understanding the structure of the local UK stock market in London. The table below displays the primary benchmarks and their constituent stocks (listed by number). Most investors default to the FTSE All-Share index or the FTSE 100 index, as there’s not a significant difference between the two, as large-cap FTSE 100 stocks dominate the FTSE All-Share index. Both tend to be dominated by large-cap, global names such as HSBC, BP, or GSK. 

The FTSE 250 index is comprised of mid-cap names and is often used as a (poor) proxy for the UK economy; it is allegedly populated with faster-growing companies. The FTSE Small Cap index does what it says on the tin: it tracks the smallest names by market cap in the FTSE All Share index. The idea is that from tiny acorns, mighty oaks grow. It’s true that for most decades: small-cap stocks have outperformed large-cap stocks (though with more volatility), but this hasn’t been the case in the last decade.

Beyond these well-known benchmarks, we have the FTSE AIM index, which tracks the stocks on the Alternative Investment Market. This was intended to be a carefully curated collection of high-growth businesses, but it has been a significant disappointment in recent years, massively underperforming nearly every benchmark worldwide, except possibly China. Last but by no means least, I also have a soft spot for the MSCI UK index and the MSCI UK Small Cap index: the first tracks a smaller number of large-cap names than the FTSE 100, and the latter covers a broader range of UK small-cap stocks. 

Two points jump out straight away. The first is that the AIM market has been a real disappointment, and I have a hunch it won’t be around in its current shape in future years. It’s in need of real TLC by the LSE. The second point to make is that there are alternatives to the FTSE indices, with MSCI providing real competition. 

UK equity benchmarks

Decent, if mediocre returns

The various UK indices or benchmarks have produced what I would describe as pedestrian returns over the last decade, i.e. decent returns but nothing special. The table below uses data from Sharescope to summarise price returns for the various indices and then compares them to the FTSE All-World index. The bottom line? Pretty much every UK index has underperformed the global benchmarks, dominated as they are by US equities – which have massively outperformed but, as we know, past performances aren’t an accurate indicator of future returns. 

What explains this underperformance, apart from that massive US exceptionalism? One simple word, I think, suffices: earnings or lack of earnings growth. 

Many would point the finger at Brexit or the UK’s low productivity growth, but in truth, the real driver of this underperformance has been that UK corporates are not as profitable as their large-cap US peers, who all enjoy consistently high margins. 

We get a hint of this in the table below, which is from quantitative strategists at French investment bank SocGen. It examines valuations and earnings growth across various geographies, including the UK.

Note that in 2025, estimates for UK earnings growth are bottom of the pack – and that’s been true for most of the last decade. EPS estimates for 2026 look much healthier, but I would suggest that weak earnings growth – which has been volatile to boot – helps explain why the UK market is on low 2025 price-to-earnings numbers, the cheapest of all regions – with only China cheaper.

But there’s an upside to this valuation: if earnings growth for UK listed businesses does pick up speed in 2026 – and analysts seem to think so – then UK stocks are dirt cheap. And that rhymes with the wave of M&A activity as global players continue to pick off UK-listed firms, as they believe valuations are low.

Nearly 50 UK-listed companies were subject to takeover interest or put themselves up for sale in the first half of 2025 – by May, there were 30 firm offers for UK-listed companies across all types of bidders, versus 27 at the same stage in 2024 with around 45% from PE firms.

Capital gains following M&A activity are not the only drivers of total returns; dividends can also contribute to these returns. The UK market is filled with companies that offer a decent dividend yield. In the FTSE 100, for example, over a third of the 100 blue-chip companies in the index (34 precisely) pay a dividend yield of more than 4%, and 10 pay over 6%. Even in the FTSE 250, which is supposedly less income-focused, 79 firms (out of 250) pay more than 4%, and 36 deliver a dividend of over 6%.

On an international level, the UK stands out as a higher-yielding, dividend-focused market. History shows us that over the very long term, for most markets, during most decades, dividends – and reinvestment plus growth in dividend payouts – make up either a significant minority or the majority of long-term total shareholder returns. 

Current International Dividend Yields (July 2025)

Nevertheless, I’d add one coda: though dividends are helpful, we shouldn’t lose sight of the fact that UK equities have underperformed even in total returns terms over the last decade. The total returns of investing in the FTSE All-Share index over the ten years until 2025 were approximately 67.3%. For the MSCI World index, the total returns over the same period were approximately 149.4%.

A map for navigating the UK markets

Lets piece together the evidence on UK stocks (and funds) and then map out how investors might navigate around this complicated universe of benchmarks, stocks and sectors. The UK is blessed/cursed with more mature global companies with lower earnings growth than their US peers. But many of these blue chips pay out a decent dividend, and that dividend has been growing over time.

So, if you want more boring, more predictable, cash flow-focused businesses, on lower valuations, then the UK might be a great place to start. By contrast, if you want a selection of fats growing but richly valued tech stocks in exciting growth sectors, then clearly the UK is not for you. The table below nicely sums up the contrast by looking at the sector mix of the S&P 500 and the FTSE 100:

* Indicates an estimate based on varying industry classifications.

In my view, investors globally have gone all in on growth stocks, growth sectors, and the global growth market, which is primarily the US. That has paid off handsomely in the last ten years and might pay off handsomely again in the next ten years.

However, the price is that valuations are stretched in the US, and even American investors are considering international diversification, which is where the UK markets come in. They might not be as exciting, but they are reasonably priced, liquid, mature, and dividend-focused, with a lot of variety and differentiation between types of businesses. UK stocks don’t suit everyone, but they have their place.

The content of this article is for general information purposes only and does not constitute investment advice, a recommendation, or a personalised financial promotion. Any reference to specific investments, funds, indices or strategies is illustrative only and should not be interpreted as a solicitation to buy or sell any investment product.

The value of investments and the income from them can go down as well as up, and you may not get back the amount originally invested. Past performance is not a reliable indicator of future performance. Investment returns may be affected by currency fluctuations, market conditions, economic events, and tax legislation, all of which may change.

Before making any investment decisions, you should consider your individual circumstances, objectives, and risk tolerance, and seek independent financial advice where appropriate. This article does not take into account your personal objectives or financial situation.

References to tax treatment or regulation are based on current UK law and may be subject to change.

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