CONTRIBUTORS
Michael Browne
Senior Investment Strategist,
Franklin Templeton Institute
The UK equity market is known for its steady, dividend-paying companies, especially when you look at the larger stocks in the market. This market, as measure by the FTSE All-Share Index, has delivered an annual return of more than 12% over the past five years.1 Yet, it’s a market that’s always underestimated.
Perhaps comparison is the thief of joy when it comes to UK equities. Its perception compares quite starkly with that of global equities which continue to be the flavor of the month, especially with their large exposure to the rapid growth of the United States and its glitzy Magnificent Seven2 constituents.
And yes, it all feels like a proverbial case of the tortoise and hare.
Let’s start with the UK large-capitalization stocks. The larger end of the UK market has been providing a dividend yield of over 3.4%, plus earnings growth for 2025 of 8%. And, a sharp uptick in share buybacks has further bolstered returns.3 It hardly surprising to us that they have been delivering over 12% per annum over the last five years! However, in our opinion, the most compelling factor lies in their relatively low valuation compared to both historical standards and international benchmarks.
Investing in UK large caps is particularly interesting when you consider that over 80% of the earnings from the FTSE 100 Index are from overseas.4 Quite simply, investing in large-cap UK stocks offers a positive stake in the global economy and all at what we consider a discounted valuation. The FTSE 100 may have smashed through the 9,000 mark recently, but we believe there’s still a lot of room to go further.
In our opinion, the valuation opportunity becomes even more compelling when you move to the small- and mid-cap segments of the UK market. This has been evidenced by the uptick in acquisition activity as private equity and overseas companies look to snap up well-run UK companies at what we consider attractive valuations. Bid activity for FTSE 250 Index companies increased four-fold between 2023 and 2024, with little signs of slowing down in 2025.5
Small- and mid-cap stocks are typically more domestically exposed, which means their share prices tend to be more closely correlated to UK sentiment. Brexit, COVID-19, the Truss mini-budget and recent uncertainty over government taxation policy have all certainly weighed on the minds of investors. However, instead, we would suggest this period has made many well-run companies both leaner and more versatile. In our analysis, many balance sheets look healthy with management teams taking shareholder-friendly, prudent approaches to balancing their books. We believe the UK investment opportunity is much more than just a valuation story.
At a macro level, fundamentals underlying the UK economy remain appealing on a global level. Recent growth has modestly outperformed the prevailing global trend, with the United Kingdom recording the highest growth rate among G7 countries in the first half of the year. Looking to the UK consumer, the UK personal saving ratio is currently at 9.6%, which is more than 1% above its long-term average,6 and more than double the United States’ current savings rate of only 4.5%.7 The UK consumers have been squirreling away savings at a remarkable rate since 2020, and as a consumer-led economy, this matters. The question is: What will unleash the spending power of the UK economy? Perhaps more interest-rate cuts or more clarity on the governments taxation plans. Whatever the solution, if consumer confidence improves, and that spending power is unlocked, it should provide a big boost to the economy.
Individual Savings Rate in the United States and United Kingdom
UK Personal Savings Rate
December 2000 to March 2025
Sources: FactSet, ONS – UK Office for National Statistics.
US Personal Savings Rate
December 2000 to March 2025
Sources: FactSet, US Bureau of Economic Analysis.
Of course, like all investments, there are still obstacles along the way. The geopolitical landscape is volatile. The anticipated path for rate cuts may not materialize fast enough to support economic growth in 2025. Uncertainty around government debt levels and tax policies could hold back consumer sentiment in consumption, keeping savings high. However, no equity investment comes without risk. Right now, we believe the balance of risk/reward looks heavily weighted toward the upside for UK equities.
In our analysis, UK equities have quietly been performing well; and looking forward, they continue to offer exceptional value, backed by strong foundations. Conditions are aligning to support UK equity market’s performance with attractively valued small- and mid-cap areas of the market, likely to move quickly as soon as that value is realized. Don’t be surprised, like the hare will be, when the tortoise accelerates!
EndNotes
- Source: FactSet, as of July 31, 2025. The FTSE All-Share Index tracks the performance of around 600 companies listed on the London Stock Exchange, covering about 98% of the UK equity market’s value. Past performance is not an indicator or a guarantee of future performance. Indexes are unmanaged and one cannot invest directly in an index. Important data provider notices and terms available at www.franklintempletondatasources.com.
- The Magnificent Seven comprises Alphabet, Amazon, Apple, Meta, Microsoft, NVIDIA and Tesla.
- Source: Bloomberg. As of August 28, 2025.
- Sources: FTSE Russell, as of September 30, 2022, and MSCI UK Index 2025. The FTSE 100 Index tracks the 100 largest companies listed on the London Stock Exchange, representing the biggest and most internationally focused UK firms. Past performance is not an indicator or a guarantee of future performance. Indexes are unmanaged and one cannot invest directly in an index. Important data provider notices and terms available at www.franklintempletondatasources.com.
- Source: Peel Hunt “M&A” Charles Hall, as of July 2, 2025. The FTSE 250 Index tracks the next 250 largest companies after the FTSE 100, representing more mid-sized and domestically oriented UK firms.
- Source: Office for National Statistics, as of June 30, 2025.
- Source: Bureau of Economic Analysis, as of July 31, 2025.
What are the risks?
All investments involve risks, including possible loss of principal.
Equity securities are subject to price fluctuation and possible loss of principal.
Small- and mid-cap stocks involve greater risks and volatility than large-cap stocks. Large-capitalization companies may fall out of favor with investors based on market and economic conditions.
Dividends may fluctuate and are not guaranteed, and a company may reduce or eliminate its dividend at any time.
International investments are subject to special risks, including currency fluctuations and social, economic and political uncertainties, which could increase volatility. These risks are magnified in emerging markets.
WF: 6562130