The Viewpoint: Optimism brews for UK equities

Earlier this year, we made the case for the UK equity market.

In addition to the arguments that the asset class is unloved and undervalued, we also made the point that investing in the UK offered diversification away from concentrated investments in the US, something that investors might want to do as President Trump’s rather erratic approach to economic policy is clouding the outlook there.

The UK market has indeed held up better than the US market so far in 2025, particularly in sterling terms given US dollar weakness. But the UK’s headline performance also masks another trend: the larger companies of the FTSE 100 have continued to significantly outperform the mid-sized companies of the FTSE 250. Perhaps these mid-tier companies are another area that investors should reconsider? Other corporates are certainly doing so, with a number of mid-sized companies already having received bid approaches so far in 2025 (for example property companies Urban Logistics and Assura, as well as food producer Bakkavor).

While the FTSE 250 includes lots of international businesses – with notable examples such as Burberry, Tate & Lyle and Inchcape – I think that overall, it has a more domestic UK skew to it than the FTSE 100. Around half of the index is made up of UK focused financial companies, retailers, real estate and domestic building related businesses. These businesses are relatively immune from direct US tariff-related impacts, although they may feel some chill from any slowing of the overall UK economy, as the effects of US policy wash around the globe.

Perhaps the recent global macroeconomic turmoil opens the door to further reductions in UK interest rates

The share prices of many of these businesses are closely linked to the health of the UK consumer and interest rate levels. It would be fair to say that in the current cycle, UK interest rates have come down more slowly and later than many people had expected or hoped – largely because inflation has stayed stubbornly high. The future path of inflation remains open to debate and there are still some factors which will put upward pressure on prices and hence inflation, not least of which are the increases to national insurance that the Chancellor put through in the October 2024 budget. However, it is an ill wind that blows nobody any good, and perhaps the recent global macroeconomic turmoil opens the door to further reductions in UK interest rates. Two disinflationary things worth considering here are the sharp fall in the oil price – which has accompanied worries around global trade – and the possibility that some Chinese goods that may have been destined for the US could now find their way into European markets at discounted prices. Both these factors could lower UK inflation and allow more scope to reduce interest rates.

Lower interest rates could be a catalyst to get the UK housing market out of the doldrums and may also encourage consumers to start spending some of the savings they have been holding. It would be bold to expect UK growth to accelerate dramatically from here, but in asset classes where expectations are very low indeed, things do not need to be brilliant for share prices to rise – just less bad than feared.

For professional investors only. This material is not suitable for a retail audience. Capital at risk. This is a financial promotion and is not investment advice. Past performance is not a guide to future performance. The value of investments and any income from them may go down as well as up and is not guaranteed. Investors may not get back the amount invested. Portfolio characteristics and holdings are subject to change without notice. The views expressed are those of the author at the date of publication unless otherwise indicated, which are subject to change, and is not investment advice.