Importance Score: 45 / 100 🔵
Investing in the UK stock market is under scrutiny as US market dominance has impacted pension savings in recent years. Many investors, seeking stable returns, have increasingly allocated their portfolios towards British funds and shares. However, recent market volatility presents a more nuanced picture, suggesting a potential shift in global investment strategies.
The Allure of UK Equities
Recent market fluctuations have somewhat evened the playing field. Notably, the FTSE 100 has experienced a comparatively modest decline of only 3 percent in 2025, contrasting with the steeper drops seen in America’s S&P 500, down over 10 percent, and the technology-heavy Nasdaq, which has fallen by more than 15 percent. (These figures were accurate as of Thursday’s market close and are subject to change.)
The global economy is currently navigating the complexities of international trade policies. The ongoing market volatility indicates investor uncertainty in assessing the full repercussions of these policies, with daily market swings reflecting this indecision.
Navigating Investor Uncertainty
These are indeed challenging times for investors. Determining the optimal strategy – whether to buy, sell, or adopt a wait-and-see approach – remains a significant dilemma.
However, periods of crisis often breed opportunity. Market downturns can sharpen investment focus and serve as an ideal trigger to re-evaluate portfolio diversification.
Investors should assess their holdings in asset classes like bonds, which historically offer a buffer during equity market declines. Alternatively, those comfortable with market fluctuations might reconsider the necessity of bond allocations.
Savvy investors are also paying close attention to the geographical distribution of their investments.
In light of the shifting global landscape, adjustments to international asset allocation may be prudent.
The challenge lies in the ambiguity of this emerging global order. While it may signal a contraction in worldwide commerce, it could also foster intensified trade relationships between Asia and Europe.
Rather than engage in extensive speculation, focusing on the familiar terrain of the British stock market may offer a more grounded investment perspective.
British Shares: Undervalued and Attractive
The UK stock market has been considered undervalued for an extended period and continues to represent compelling value. This assessment is supported by several valuation metrics.
The price-to-earnings (P/E) ratio is a widely used metric for gauging value. Prior to recent market disruptions, the FTSE 100 traded at a P/E ratio of 11.9 times projected earnings. This contrasted sharply with Europe at 13.9 and the US at 21, indicating that UK shares were significantly more affordable compared to their US counterparts, approximately 43 percent cheaper.
Recent market turbulence will necessitate revised earnings forecasts from analysts.
Downward revisions in earnings projections for many UK companies might offset some of the apparent cheapness of shares based on P/E ratios.
Nevertheless, to reiterate, UK shares were attractively valued relative to historical norms and international markets, and current conditions suggest they may be even more so now.
Superior Dividend Yields
Another compelling aspect of the UK market is its attractive dividend yields compared to other global markets. Before recent tariff-related market volatility, UK shares offered an income yield of 3.8 percent.
This compares favorably to the global stock market average of 1.8 percent and the US market’s 1.2 percent.
Economic uncertainties and tariff impacts may challenge companies’ capacity to sustain dividend payouts. However, falling share prices will inherently inflate notional yields, with some reaching notably high levels.
For example, Legal & General, a leading UK insurer, currently yields around 9.8 percent.
Investment firms Phoenix and M&G both offer yields exceeding 10 percent, a rare occurrence for companies of this scale.
Looking ahead, we may be transitioning from a prolonged market rally driven by share price appreciation towards an environment where dividends play a more crucial role in generating total returns.
UK Economic Landscape: Factors to Consider
A strengthening economy typically fuels corporate profitability. However, economic forecasting is inherently challenging, particularly amidst prevailing market volatility.
Economic growth projections are being revised downwards. Consensus Economics surveys indicate a reduced UK GDP growth forecast for 2025, now at 0.8 percent, down from 1.2 percent at the start of the year.
However, some short-term economic indicators present a more positive outlook. Recent data revealed robust UK economic growth of 0.5 percent in February.
Remarkably, this growth was propelled by the manufacturing sector, including automotive, electronics, and pharmaceutical industries. This sector strength might be the envy of international counterparts.
Another positive signal is lower-than-anticipated inflation figures for February, at 2.8 percent. This could encourage the Bank of England to consider interest rate cuts, providing a stimulus to the economy.
Current market expectations anticipate up to four UK interest rate reductions in 2025, bringing rates down from 4.5 percent to 3.5 percent. While beneficial for borrowers, lower rates also incentivize investors to seek income-generating assets, potentially shifting capital from cash towards equities and other higher-yielding investments.
The approval of major infrastructure projects, such as airport expansions and the Thames tunnel, could further bolster economic growth. Furthermore, some of these projects now offer investment opportunities for individual investors, providing potential income growth.
The International Public Partnership investment trust (INPP), with a portfolio spanning hundreds of infrastructure projects, including a significant UK presence (over 70 percent, including London’s ‘super sewer’), aims for consistent yield growth, currently at 6.11 percent. INPP is featured in investment recommendations and has demonstrated resilience, with recent positive performance. (Disclosure: The author holds INPP shares).
The pivotal question remains: how will the UK economy perform within the evolving global order? Can Britain establish a distinct role amidst global uncertainties, potentially acting as a bridge between Europe, Asia, and the US? This remains a major unknown.
It appears likely that defensive sectors within the stock market, such as pharmaceuticals, supermarkets, and utilities, may continue to outperform in the near term. However, complexities persist, even for defensive sectors. For instance, pharmaceutical companies face potential cost increases in their largest market.
Companies with a primary focus on the UK market might offer a safer haven. These are more commonly found within the FTSE 250 index of mid-sized companies rather than the FTSE 100.
Notable performers during recent market turbulence include retailers and construction-related businesses. Currys, Travis Perkins, and Mitchells & Butlers have shown positive gains.
Alternatively, broad market exposure can be achieved through ETFs like the Vanguard FTSE 250 ETF, recognized for its low expense ratio.
Finally, there are indications of renewed domestic investor interest in UK shares. Surveys reveal increasing optimism among UK investors regarding buying opportunities in the British stock market, particularly among younger demographics.
Personal portfolio allocation reflects this trend, with a significant portion invested in the UK market, higher than typical global portfolio allocations and increased from previous levels.
Navigating Market Volatility: Historical Perspective
Market downturns often trigger familiar investment adages. However, historical data offers valuable context during periods of market stress.
Historical analysis reveals the cost of missing the market’s best-performing days. The data, while US-centric, shows comparable patterns in the UK and other markets, albeit with potentially different magnitudes of returns.
In the UK, missing the 30 best trading days over a 32-year period would have significantly reduced total returns.
Furthermore, examining the FTSE 100’s performance following its largest single-day declines demonstrates a pattern of substantial gains in the subsequent five years.
While past market trends are not guarantees of future performance, historical context is valuable.
Another consideration when investing in undervalued markets is patience. Undervalued markets can remain so for extended periods, as the UK market has experienced. Investor patience is essential.
The advantage of investing in the British stock market lies in the potential to earn robust income while awaiting market recovery and growth.