Pros weigh in: does UK rally have legs and are shares still cheap?

Since 9 April – when US President Donald Trump eased market nerves over his tariff policies – it has been a fruitful period for investors with exposure to the UK stock market.

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For those who prefer to simply own the market (the FTSE 100) through an index fund or exchange-traded fund (ETF), returns were 26.9% from 9 April to 20 November. The UK’s premier index peaked at over 9,900 points earlier this month before concerns over a potential artificial intelligence (AI) bubble across the pond knocked some wind out of its sails. At the time of writing, the index stood at around 9,550, much higher than its 8,260 level at the start of the year.

The FTSE All-Share has delivered a similar return of 26.4%. As recently observed in our “Around the world in ETFs” series, this reflects the fact that despite holding more shares, it is heavily exposed to the FTSE 100 and behaves in line with that market due to the sheer size of the top 100 companies.   

While the UK stock market has hardly any technology stocks and is therefore light on exposure to the AI theme, receding investor optimism amid concerns over AI spending going into overdrive played a part in the pullback over the past couple of weeks. However, this isn’t the only factor, with the upcoming Autumn Budget also weighing on investor sentiment and leading to some profit taking.

For several years, the UK has been widely described as an “unloved” market, with its valuation lower than historical standards and cheaper than other regions, particularly the US.

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Following the strong recovery since 9 April, a key question investors will now be asking themselves is whether the rally has further to run.

In terms of valuations, the Vanguard FTSE 100 ETF (LSE:VUKE) is trading on a price/earnings (P/E) ratio of 18.2x compared with 28.5x for the Vanguard S&P 500 ETF.

The P/E ratio is the most common way of valuing a stock and a key ratio for analysts and investors alike. P/E shows what investors will pay for £1 of earnings, and indicates whether a stock or market is over or undervalued. Typically, the higher the predicted growth in profits, the higher the P/E.

Heading into 2025, UK shares were cheaper on this measure, but fund managers focusing on this area argue that valuations remain compelling.

Addressing UK stock market strength since Liberation Day, James Henderson, manager of Law Debenture Corporation (LSE:LWDB), said in a recent video interview with interactive investor that “it’s early days on this rally”.

Henderson said: “It’s relatively more expensive than it was. The market’s up 20%-odd in the last year and it’s predominantly in the bigger companies. So, something like the banks, we were holding well below book. Now they’re closer, or sometimes over book. We are actually reducing them a bit and buying further down the market cap scale. But [the banks] are not expensive. They’re just not as cheap as they were, so that’s why we’re reducing.

“It’s early days in this rally...in my view, in much of the UK, and it’s wrong to sell too much too early. You can just reduce a bit. If [the banks] make the kind of returns on capital that they could make over the next few years, they should trade at a premium to book. And we’re beginning to see [it], but that’s not fully priced in yet.”

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Alex Wright, manager of Fidelity Special Values (LSE:FSV), also strikes an upbeat tone. Wright says that “while there has been some narrowing in regional valuations following strong performance, we believe that the UK has room to run further”.

He adds: “It continues to trade at a meaningful discount to other regions, both on an absolute basis and when adjusting for sectoral differences in markets. Importantly, this gives investors a more attractive starting point compared to other more expensive markets.

“We remain excited with the prospects for our holdings. Overall, we believe the UK market has an under-appreciated richness of opportunity, combining strong earnings growth, high dividend yields and low valuations.”

Brendan Gulston, co-manager of WS Gresham House UK Multi Cap Income fund, points out that UK larger companies have been “benefiting from the UK’s relative insulation from global trade and our services-focused economic exposure”.

However, more domestically focused companies, those found in the smaller company part of the market, have lagged the rally. As a result, Gulston says that “further down the market cap spectrum the valuation discount is even more pronounced”.

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While one would expect UK fund managers to talk up the prospects of the market they are investing in, it’s perhaps more notable when a manager with a global remit has a sizeable position in UK shares. Two examples are Brunner (LSE:BUT) and STS Global Income & Growth Trust (LSE:STS).

Julian Bishop, manager of Brunner Investment Trust, recently appeared on ii’s On The Money podcast. Bishop said while the UK market “is an older economy, less glamorous, [and with] probably less growth”, it produces “loads and loads of cash flow, loads of dividends”. The trust holds nearly a quarter of its portfolio in the UK.

“If you look at anything like consumer staples, utilities, banks, grocers or energy names, you’ll almost always pay more in the US than you would in the UK or in Europe. So, for all the sectors like that, when we’re making our decisions, we tend to skew slightly towards the UK or Europe over the US.

“For example, we invest in Tesco (LSE:TSCO) at the moment, a leading grocer in the UK and [a firm] in a really good competitive position now. It’s got about a 6-7% free cash flow yield, so it chucks off lots of cash that it returns to shareholders via dividends and buybacks. That’s a pretty nice financial algorithm, we think. Not cyclical, a good market position, and lots of cash flow.”

James Harries, manager of STS Global Income & Growth, appeared on ii’s On The Money podcast over the summer. The trust holds around a third of its portfolio in UK shares. 

Harries said that while he doesn’t usually think too deeply about where a company is listed – instead focusing on where it makes money – he described the UK as a bit of an exception. “The UK has been in what you might describe as the capital markets’ doghouse for really quite a long period of time for all the reasons we know; Brexit, particularly, but for lots of other reasons. Therefore, it does oddly, geographically, idiosyncratically, look cheap.”

Examples of UK stocks held in the trust include Unilever (LSE:ULVR), Reckitt Benckiser Group (LSE:RKT) and Admiral Group (LSE:ADM).

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Morningstar, the analyst, is also bullish on the prospects for the UK. It says that UK smaller company stocks remain deeply discounted, which has attracted private equity and international buyers, with Britvic and Darktrace two examples.

With the prospect of further interest rate cuts to come in 2026, Morningstar says housebuilders are another pocket of value, highlighting Persimmon (LSE:PSN), Barratt Redrow (LSE:BTRW), and Taylor Wimpey (LSE:TW.) as potential beneficiaries all trading at attractive levels.

Morningstar notes: “UK equities offer access to international earnings streams and dividend yields that outshine other G7 markets. While the index is concentrated – the top 10 stocks make up about 43% of total market cap – these are globally diversified leaders spanning energy, pharmaceuticals, industrials, financials, and consumer defensive sectors.”

A separate interactive investor article written a year ago examined the potential concentration risk of the UK market.

Which funds and investment trusts fared well as the FTSE 100 rallied?

A recent report from the analyst Stifel points out that (to 5 November) most UK Equity investment trusts have delivered returns of around 20%-plus over the past year.

It said: “There’s been some notably strong performance from the managers focused on value and out-of-favour sectors such as Temple Bar (LSE:TMPL) and Lowland (LSE:LWI). The managers focused on companies delivering good income growth are also performing well; these include City of London (LSE:CTY) and Law Debenture (LSE:LWDB).”

Stifel adds that a key attraction of many trusts investing in UK equities is the relatively high dividends they pay, typically in the range of 3.5% to 5%. “The highest yielder is Aberdeen Equity Income Trust (LSE:AEI), which is managed by Thomas Moore with a focus on out of-favour companies and has a yield of 5.9%,” it said.

In terms of open-ended funds, from 9 April 2025 to 20 November 2025, two of the three UK fund sector average returns have been a couple of percentage points short of the FTSE 100 and FTSE All-Share.

Past performance is not a guide to future performance.

Winners over this period (previously highlighted in this article) are value-focused funds. Funds that have delivered 30%-plus gains over this period include Artemis SmartGARP UK Equity, Dimensional UK Value, M&G Recovery, Artemis UK Select, Jupiter UK Alpha, Schroder Recovery, TM Redwheel UK Equity Income and abrdn UK Value Equity.

Two tracker funds that stood out, with respective gains of 32.3% and 31.2%, are Invesco FTSE RAFI UK 100 ETF (LSE:PSRU) and Vanguard FTSE UK Equity Income Index. 

The Vanguard tracker, one of interactive investor’s Super 60 investment ideas, has comfortably outperformed the UK equity income sector average over one, three, five, and 10 years. As well as performance beating many fund managers, the fund generates a higher yield than the wider market, currently 4.0%. This is because the index it follows – the FTSE UK Equity Income index – consists of shares “that are expected to pay dividends that generally are higher than average”.

We recently did a deep data dive into the tracker fund, explaining why active fund managers struggle to beat it.