Three reasons UK outperformance can continue

An unusual trend is emerging this year: UK shares are outperforming.

The FTSE All-Share, which contains the largest listed shares in the UK, has risen nearly 9% in 2025, including dividend reinvestment.

In contrast, UK-based investors tracking the MSCI World index have lost -1%, while those tracking the S&P 500 index have lost 4%.

• Our Services: SIPP Account | Stocks & Shares ISA | See all Investment Accounts

A weakening dollar has been a drag on performance for international shares, as the dollar has dropped about 8% against the pound. This has also hurt global indices, such as the MSCI World, which is 70% invested in dollar assets.

However, even looking past currency swings, there is momentum building for UK shares. Here are three reasons why UK shares can keep beating American ones.

• Fund Spotlight: consistent performer yielding over 6%
• How to invest like the best: Benjamin Graham

More interest from overseas

The first sign is that international investors are returning to the UK. Money flowing into the market means higher prices for shares.

Alec Cutler, manager of Orbis Global Balanced fund, said: “Momentum is starting to build in Europe and the UK, and the momentum is starting to wane in the US.

“Historically, over the last five, six years, tonnes and tonnes of money flew out of the UK and Europe and the rest of the world into the US, so there’s this massive wall of water, money, that’s been ploughed into the US and pulled out of everywhere else. That’s starting to come back. As that gains momentum, we will benefit tremendously from our holdings in the UK, Europe and elsewhere.”

His view is beginning to appear in the data: Bank of America’s survey of fund managers finds that the amount of investors that are net underweight UK shares is shrinking.

Moreover, fund data firm Calastone found that in May “UK-focused funds saw reduced outflows – down to half the average over the last three years.”

So, while it’s not yet a flood of money flowing into the UK, outflows are slowing as international investor interest increases.

• Watch our Orbis Global Balanced interview: momentum building in UK but these stocks still cheap
• Watch our Orbis Global Balanced interview: why gold and defence shares will keep rising

UK shares are good value

Another driver of strong UK returns recently has been investors looking for better value shares in the face of rising economic and geopolitical uncertainty.

Paying less for a company (such as relative to earnings or a company’s assets) can give an investor a better “margin of safety” - as a lot of the bad news for a stock is already in the price, as opposed to expensive shares where expectations are extremely high.

Cutler explains: “The key investment decision for us is to not buy expensive things and look for things that are selling well below their value. Good things could happen, bad things can happen. But invest in things that don’t have the expectations for things to continue to be good.”

• The great investment strategies: value investing
• Fund managers’ favourite UK smaller companies

Plenty of British companies fit the bill for value managers. Cutler says the UK is home to “excellent companies that are valued like crappy companies” and that shares are still inexpensive.

For example, he owns engineering firm Balfour Beatty, which he says is one of the best engineering construction companies in the world.

“Recently, the shares have performed nicely. We’re starting to see a payoff for that investment. But it’s still very, very inexpensive,” he said.

Another British firm he likes is Keller Group, a geo-engineering business providing essential services before starting construction projects.

Cutler says: “They’re the world leader in it and we were able to buy Keller over a three-year period at four, five times earnings. The stock has doubled and they’ve grown earnings, so now we own it at eight times earnings. It’s a fantastic company. If it was listed in the US, it would be at 20 times earnings.”

They can weather tariff shocks

The UK market is “reasonably insulated” from Donald Trump’s trade wars, according to value investor Alex Wright, who manages Fidelity Special Values Ord (LSE:FSV) investment trust, which is one of our Super 60 investment ideas.

This means that the market is less likely to drop due to political changes in America.

Wright says: “We’re not a big exporter. We don’t have a big trade surplus with the US unlike the European Union or China.

“Also, if you look at the make-up of the UK market, it doesn’t have exposure to the type of companies which are badly affected by tariffs.”

By this, he means that British companies are generally not advanced manufacturing or technology companies, such as Apple Inc (NASDAQ:AAPL) or automakers, which have complex global supply chains.

“So, it’s not really about a UK-US trade deal, it’s much more about the make-up of the UK economy and the make-up of the UK market that makes us reasonably well-placed in this world where there’s a lot of uncertainty about those tariff levels,” Wright says.

A way of protecting your portfolio further from trade tensions is to increase exposure to companies that have a domestic focus, according to Wright.

• Watch our Fidelity Special Values interview: why UK market will weather tariff storm, and backing the banks
• Watch our Fidelity Special Values interview: why I no longer invest in US shares

He says that UK retailers are attractive for this reason and has added DFS Furniture and Frasers Group, which used to be called Sports Direct.

Wright says: “Those stocks are very attractive valuations and, I think, are benefiting from those trends which are basically reducing their prices, while at the same time the consumer has potentially got more money to spend as interest rates fall.”