UK equities are having their time in the sun. The FTSE 100 recently hit an all-time high of 9,000, driven by a broad recovery in equity prices. To put it another way, the rally wasn’t just driven by a handful of outperformers. In fact, during the first half of the year, UK equities have done better than their US peers, reversing a decade-long trend of US outperformance. Since the start of 2025, the FTSE All-Share has delivered a total return of just over 9% in local currency terms. In US dollar terms, it produced a total return of 19%, significantly outperforming the S&P 500’s 6%.
According to numbers compiled by the wealth-management giant Schroders, the outperformance has been driven not by earnings growth, but by multiple expansion – a side effect of investors’ confidence improving. Over the first half, Schroders calculated the UK’s total return was driven by a 10% increase in valuation and a 2% return from dividends. Earnings, on the other hand, proved to be a headwind, taking 3% off returns as analysts pushed growth projections lower due to global uncertainty (mainly over tariffs).
UK equities: a growth story
Sentiment counts for a lot in markets and in the UK that has improved dramatically (albeit from a very low base) over the past six to 12 months. It might not seem like it, but the UK has experienced the strongest run of positive economic surprises among developed markets since January. According to Citi’s Economic Surprise Index (once again, from a very low base), sentiment around the UK’s trade-deal “hat trick” with the US, India and the EU seemed to reignite investors’ sentiment about growth. There’s also the tailwind of interest rates. Markets are pricing in several rate cuts by the Bank of England over the remainder of the year and into 2026. Lower rates should support domestic cyclical stocks such as retailers, housebuilders and builders’ merchants. These rate-sensitive sectors should also benefit as Labour’s efforts to drive investment in infrastructure and planning reforms start to yield results.
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Despite the market’s strong performance so far this year, investors, particularly those in the UK, are still leaving in droves. According to equity fund flow data compiled by JPMorgan, over the last 12 months, around £32 billion has flowed out of UK equity funds, equivalent to 11.6% of starting assets under management. Investors seem to be selling into the rally, with outflows accelerating over the past few months despite recent market highs.
It might come as a surprise, but on a top-down basis, UK equities are a growth story. Estimates from JPMorgan have earnings per share in the FTSE 100 growing by 11.5% in 2025, before falling back to 2.5% in 2026. Schroder’s Intelligence, on the other hand, has earnings per share growing 3% this year and then 12% in 2026. Whichever way you look at it, that’s projected earnings growth in the mid-teens over the next two years. Based on that, the FTSE 100 is trading at an average forward price-earnings (p/e) ratio of 12. “This represents a 10%-15% discount to their 15-year medians and a substantial discount compared with the US market,” according to JPMorgan.
Dig deeper, and the valuation is even more compelling. “UK mid-caps trade at 12 times expected 2025 earnings, with earnings forecast to grow at around 15% year-on-year, indicating potential good value (a p/e ratio less than the growth rate). There’s potential for a re-rating if domestic growth persists,” the investment bank adds.
UK equities: key risks to avoid
There are compelling reasons to buy UK equities, but there are also plenty of risks to consider. JPMorgan makes it clear that domestic stocks are favoured over international exporters. Over the past four years, industrial energy prices in the UK have risen to the highest levels in the developed world, making it difficult for most producers to compete with their international counterparts. A significant portion of the UK’s industrial base has vanished as a result. It doesn’t look like this environment is going to change anytime soon.
Utilities also look risky due to political interference, high capital spending requirements and generally poor return profiles. Indebted consumer stocks, which will suffer if wage growth stagnates, should also be avoided. The major lingering risk for UK equities is the potential for further tax rises. The Labour government has been floating numerous potential tax hikes in the autumn Budget. With the country’s finances deteriorating and a complete lack of political will to cut spending, additional taxes are almost guaranteed. Additional taxes will have an impact on consumer spending and business activity. Based on the last round of tax hikes, which dented business confidence and squeezed hiring, investors do need to consider this risk on the horizon.
The valuation of UK equities compared with international peers has already led to a wave of takeover offers. As UK investors flee, international investors are seizing the opportunity to swoop in. The value is there, and private equity is capitalising on it. Real estate investment trusts (Reits) have become a particular area of interest. Assura, Urban Logistics, Care Reit and Warehouse Reit have all been acquired this year. Due to an interesting quirk in the law regarding stamp duty, it is often cheaper to purchase property through a company structure than to buy it directly. Shares attract stamp duty at a rate of only 0.5%, while corporate bodies buying certain types of property may face stamp-duty rates in the mid-teens. So, acquirers receive a tax benefit, as well as the opportunity to purchase property at a discount to its market rate. At the beginning of June, there had been more than 30 bids for companies worth more than £100 million, with an average premium of 45% across all sectors.
Aside from the real-estate sector, high-quality UK mid caps and small caps look attractive, trading at historically wide discounts to their US peers and with international revenue footprints. Banks offer dividend yields in the mid single digits with further capital returns likely as profits continue to grow and are still trading at relatively low valuations despite their shares rising to levels not seen since before the financial crisis.
UK equities: go for quality
So where should investors be looking for value? As ever, quality is key. A fascinating study on this topic emerged at the beginning of July in the form of a Panmure Liberum report, “Accounting red flags: high-quality stocks lead”. The research, building on academic studies and machine-learning applications, aims to help investors identify high-quality stocks, avoid corporate failures and enhance returns. The framework focuses on three main areas: accounting quality, audit risk and governance oversight. Companies were categorised into the top 30% (highest accounting quality) and the bottom 30% (lowest accounting quality) baskets (excluding financial and real estate companies due to issues arising from leverage). Over the past five years (ending June 2025), the report found that the top 30% quality basket in the UK outperformed the bottom 30% by an annualised 9%.
After analysing the data on reports from 2024, the analysts compiled a select list of UK equities that they believed met all the criteria they were looking for in terms of companies with the best-quality accounts. The list includes the likes of Associated British Foods, BT Group, DCC, Games Workshop Group, Halma, Mitchells & Butlers, National Grid, J. Sainsbury, SSE, Taylor Wimpey and Whitbread.
UK equities: promising healthcare champions
Panmure Liberum has also dived into the healthcare sector in the UK. Healthcare, biotechnology and pharmaceuticals are all areas of strength in the UK economy. They are among the most significant growth sectors globally, given the ageing population, advancements in medical technology and increasing wealth. Advanced Medical Solutions (LSE: AMS) sits in the sweet spot of UK value and is one of Panmure Liberum’s favourite plays. The company has a portfolio of “medtech” products, mostly developed in-house, focused on the surgical and wound-care markets. It was a small-cap champion and returned more than 1,000% between 2010 and mid-2018. However, the business struggled to grow into its valuation, and the stock is down around 30% over the past five years. Still, Panmure thinks this is the “best rerating story” in the medtech sector and looks “most obviously oversold” when compared with historic ratings. The company has made several strategic missteps over the past five years, which have hindered growth in the US market. Difficulty digesting a recent acquisition has also spooked investors. But while the market struggles to understand the business, private equity is waiting in the wings. A recent approach from Montagu didn’t generate an offer, but it put the company on investors’ radars. Panmure believes a fair price for the company is between 300p and 350p.
The investment bank also thinks animal genetics company Genus (LSE: GNS) is deeply undervalued. The company specialises in using cutting-edge science and technology, including genomics selection and gene editing, to enhance animal breeding. For example, in April, Genus received US regulatory approval for its product designed to provide pigs with resistance to porcine reproductive and respiratory syndrome (PRRS), a disease affecting farmers worldwide. This was a “hugely significant landmark” and is expected to lead to approvals in other jurisdictions. This treatment alone could be worth more than 1,000p per share, but much of the growth isn’t yet reflected in the company’s share price.
A wild card is CVS Group (LSE: CVSG). Investors dumped shares in the group, which owns veterinary practices across the country, when the UK regulator announced an investigation into market and pricing practices in May 2024. As investors have reevaluated their position, the stock has recovered and Panmure sees further upside. It notes that the regulator’s working paper on remedies was “relatively benign”. Initial findings are expected in September 2025, and final recommendations before January/February 2026. If the outcome of the investigation comes out as expected, analysts believe the stock could be worth around 1,600p based on historic profit multiples.
UK equities: mid caps
Berenberg has also highlighted some of the most attractive names in the UK mid-cap sector based on their growth potential. Genus is on their list, as well as electronics retailer Currys (LSE: CURY). At the beginning of the month, the company reported a 37% increase in adjusted profit before tax, along with the return of cash dividends, as the group’s cash balance rose to £180 million net at the end of the year. However, the stock is trading at a forward p/e below ten, which does not seem to consider the company’s growth potential. OSB Group (LSE: OSB) and Paragon Banking (LSE: PAG), two specialist mid-cap lenders, are also on the investment bank’s list of undervalued growth plays. The former is trading on a p/e of 4.8, while the latter is on 7.1 times forward earnings. Both have carved out a niche in the buy-to-let lending market, which, despite negative headlines, is still growing. Paragon recorded a 25% rise in new buy-to-let lending in the first half of its financial year, driven by growing demand from landlords, the firm announced at the beginning of June. OSB has had to deal with internal issues as well over the past few years, but these now seem to be behind the business. A series of updates providing evidence that the firm is delivering in the short-term will “help restore confidence”, noted Panmure in a recent note.
Other mid caps on Berenberg’s radar, all trading on a p/e of ten or less, include Kier Group (LSE: KIE), ITV (LSE: ITV), Mitie (LSE: MTO), Pets at Home (LSE: PETS) and IG Group (LSE: IGG). Kier and Mitie, in particular, are plays on the UK government’s ballooning spending bill; ITV is more of a break-up/ takeover play. IG, with its firm and growing foothold in global financial markets, is a true UK-based global champion, with a substantial growth runway ahead. One company that features on a lot of “best-buy” lists issued by the City’s top brokers is Babcock International (LSE: BAB). The defence firm is one of the major contractors for the UK’s nuclear deterrent, and the shares have more than doubled in value over the past year as the Labour government has reiterated its commitment to defence spending in the UK. The shares started the year at a discounted multiple of just 10.4 times forward earnings. Now, they’re closer to 20 times, which is a bit on the pricey side. That said, defence is a long-run, predictable business, suggesting Babcock deserves a premium valuation. JPMorgan has earnings growing 64% in 2025 and then 8% in 2026, with a 4.2% dividend yield.
Barclays’ favourite mid-cap is 4imprint Group (LSE: FOUR). The firm, which produces promotional products, is one of the investment bank’s top picks in Europe, with a potential upside of 68% to the 5,500p price target and a Barclays “quality” rating of 99%. The quality of the business is determined by its strong net cash balance (£148 million at the end of 2024), free cash flow (£103 million estimated for 2025) and return on capital employed of 77.7% in 2024. Despite these metrics, the stock is trading at an undemanding forward p/e of 12.7, with a prospective dividend yield of 5.1%.
UK equities: the best of the best
There are plenty of London-listed mid caps that look attractive at current valuations, but which ones really deserve a place in your portfolio? 4imprint seems to be one of the City’s top picks. Barclays has it as one of its top plays in Europe, and it’s one of a handful of businesses with net cash on the balance sheet. Berenberg thinks “4imprint’s highly cash-generative model and low appetite” for mergers and acquisitions suggests there is “scope for increased returns to shareholders through special dividends or buybacks”. It also thinks there’s plenty of scope for the group to expand its profit margins through economies of scale and general growth.
Genus is another firm that is universally backed by the City.
Deutsche Bank, Berenberg and Panmure have all flagged the stock as a “buy” following its winning US regulatory approval and due to rising demand for animal proteins. Babcock also has a strong following. It’s those long contract lead times that are really exciting. Berenberg puts it nicely: “Revenue guidance strikes us as conservative given the large pipeline of domestic and international defence contract opportunities, as well as the strong momentum as evidenced by the 11% average annual organic revenue growth achieved in the last three years”.
In the property sector, NewRiver REIT (LSE: NRR) has been flagged as an undervalued recovery play. As an owner of retail parks and shopping centres, NewRiver has faced a challenging few years, but the outlook is now starting to improve. “With rents still affordable and asset values near cyclical lows,” NewRiver’s portfolio is well placed to benefit from the normalisation in investors’ sentiment “and the hunt for high, stable income”, Panmure Liberum’s property team notes. The 9.1% dividend yield is fully covered and the company is trading at a 36% discount to the value of its net assets – appealing as bidders circle the sector.
Finally, there’s Mr Kipling owner Premier Food (LSE: PFD). This company has risen, like a phoenix from the ashes, over the past five years. Coming out of the pandemic, the group was overleveraged, burdened by onerous pension obligations and struggling to control a bloated cost base. It soon got costs under control, but debt and pensions remained an issue. In the past three years, it’s been able to draw a line under the pension issues and make a dent in the debt. It’s used the cash to reinvest in the business, reinstate the dividend, and is now looking for acquisition deals. After a strong few years, analysts weren’t expecting much in the way of excitement this year. They were wrong. A recent trading update beat low expectations and management reaffirmed profit expectations for the year. Growth will be driven by progress in new products and recent acquisitions. Both Shore Capital and Berenberg analysts tip the stock. It trades on a forward p/e of 13, compared with the peer group average of 17.
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