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Andy Raikes

Market Outlook

UK Outlook

Outlook
14 July 2025

By

Portfolio Manager, TT UK Equity Strategy

Latest UK economic and market outlook. 

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We continue to think the UK market looks attractive in absolute terms and in a global equity context. Valuations remain very low, as evidenced by a market-implied cost of capital that is much higher than other equity markets, and a sector-adjusted PE multiple that is close to a 40-year low relative to global equities. Also, while the UK economy has been subdued for some time, with many areas of activity at extremely depressed levels, there are some signs of green shoots appearing. Real wage growth remains strong, and interest rates have started to come down, the benefit of which will start to feed through to the economy. Indeed, relative to the concerns following the Budget last Autumn, the UK economy has proved more resilient than many feared, with the Citigroup Economic Surprise Index in the UK having risen steadily over the first half of the year. And we are starting to see evidence of this improving backdrop coming through at a corporate level, with industries and areas of activity that have been declining in recent years starting to stabilise before inflecting positively.

So far this year we have seen some reallocation within global equities away from the US to Europe, with the latter seeing significantly positive net inflows through the first half. And while the UK specifically has yet to see the benefit of positive flows, we think the overall dynamic is a positive, and indeed the UK market has been outperforming global equities in dollar terms over the first half of the year.

The second quarter began with some extreme volatility for global equities caused by the Trump Administration’s erratic and at times extreme tariff policies. But since then equity markets have regathered their poise, as proposed tariffs have been delayed and watered down. That said, the backdrop remains uncertain with many risk factors to contend with, including stretched government finances in many major economies and elevated geopolitical tensions in many parts of the world. Again, in this context we think the UK offers significant relative appeal, with low valuations, a relatively defensive equity market and a domestic economy starting to improve from very depressed levels.

Against this backdrop, we continue to run a relatively balanced portfolio with a beta of around 1. Through Q4 and the beginning of this year, we had reduced our mid-cap exposure, recognising that risks in some domestic UK names had risen following the Budget. However, during Q2 we started to add back to that mid-cap exposure as the domestic economy was proving to be resilient. And whilst mid-cap stocks underperformed their large-cap counterparts in Q4 and Q1, they now appear to have turned a corner and have been outperforming, which has been a tailwind for the fund’s performance in Q2.

Our additions to mid-caps have been skewed to domestic UK stocks, where there are strong stock specific investment cases supported by a macro backdrop that has been more resilient than feared, including companies such as Shaftesbury, Greencore and Howden. We also took advantage of weakness to add to Marks & Spencer following a cyber incident. It is in the process of ramping up the business again, particularly in online clothing, which saw the greatest disruption. Looking through short-term weakness, we see an excellent valuation opportunity, particularly as underlying operating momentum was very strong prior to the incident.

In terms of sector positioning, we continue to like Industrials, notably Construction companies and defensive growth names. Elsewhere in Industrials, we have been taking some capital out of Defence after a strong run. Meanwhile, we increased exposure to Mining, where we have been overweight gold and precious metals all year, but have now added to industrial metals. We have also added to Real Estate and Consumer Discretionary. Finally, Health Care exposure has increased, principally through the purchase of Convatec.

Important Information:

Nothing in this document constitutes or should be treated as investment advice or an offer to buy or sell any security or other investment. TT is authorised and regulated in the United Kingdom by the Financial Conduct Authority (FCA).

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