Over the last few years, the lack of exposure to UK equities among UK-based retail and institutional investors has been given as a reason for UK markets lagging other developed markets, as well as making it harder to attract companies to list on the London Stock Exchange, or even keep companies already listed in the City.
Politicians and thinktanks have been busy dreaming up incentives or drivers to force a change in behaviour.
Proposals included an effort to get pension schemes to commit to a higher allocation to the UK, recent budget changes to cut the annual tax allowance for Cash Isas in the expectation that people will put more into Stocks and Shares Isas, and plans to simplify the information provided to retail investors.
Meanwhile, the London Stock Exchange has been considering making changes to its rules to make it less onerous for companies listed in the UK and attract high-profile IPOs.
None of this has done much to change investor appetite for UK equities yet, but relative valuations may be able to do the job that government PR and incentives have so far been unable to do, as the UK is looking more attractive than US and global equities for longer-term investors.
Recent share price gains have pushed valuations to levels that are typically not sustainable over the long-term
The US has attracted an ever-larger share of global investor capital in recent years and now dominates global equity markets. American companies now account for more than 65% of the MSCI ACWI index, compared to around 49% only 10 years ago.
In contrast, UK equities account for around 3.2% in the index. This is down from around 3.5% in the summer but the UK’s share of the index has been fairly consistent over the last 10 years.
Long-term performance means a global equity investor who had taken an underweight allocation to the broad US market would most likely be seeing considerable underperformance.
Source: FE Analytics, August 12, 2024, to August 12, 2025. Total return in local currency
However, the rise in US equity valuations raises long and short-term issues for equity investors. The recent and rapid rise in some US equity valuations increases the chances of a setback if investor enthusiasm for AI-linked tech stocks goes into reverse. We’ve recently seen elevated levels of volatility in global markets due to this reason.
Longer-term, this also raises questions about the scope for further growth for US equities. Recent share price gains have pushed valuations to levels that are typically not sustainable over the long-term.
The Forward P/E ratio for the S&P 500 is sitting around 22 times, well above the long-term average of 17 times. It is also pushing towards levels seen only twice in the last 30 years, in the dot.com-era boom before the 2000 correction and in the post-COVID stock market surge.
Charles Younes: Can US tech growth keep up with expectations?
Of course, assessing the potential of any investment is more than a single metric. Expanding the assessment of different equity markets to also include earnings growth, macroeconomic environment, market momentum & sentiment, and monetary conditions offers a better view.
Earnings growth and momentum remain very positive for the US, but when these factors are considered together, the view becomes less favourable.
Against this picture, more modest valuations in other equity markets, including the UK, offer long-term investors considerably more potential for long-term gains. The UK currently faces significant headwinds from weak economic growth and investor sentiment towards the UK remains muted.
However, there is steady earnings growth and, with a forward P/E ratio of just under 13, current valuations are below the long-term average and are lower than most other developed markets.
Source: FE Analytics, 31/12/24 to 8/12/25. Total return in local currency
Some investors will argue that if a market is cheap, it is cheap for a reason, and the forecast for economic growth in the short term is worse in the UK and Europe than for the US.
However, moderating inflation in the UK offers potential for interest-rate cuts, while the significant proportion of the FTSE 100 that is made up of companies with significant global revenues means many companies are relatively unaffected by domestic economic activity.
There is a compelling reason for long-term investors to give the UK another look
The lack of technology stocks in the UK has been cited as a reason for the FTSE’s underperformance in recent years, but a lack of exposure to the concentrated growth offers investors concerned about stretched US valuations somewhere to turn.
Recent fund flow data shows UK equities remain unloved among retail investors, with the long pattern of net outflows remaining. In fact, October and November saw considerable selling of UK equity funds in advance of the Budget.
But this was part of a general pattern of selling equities and a sign of investor caution as money market funds experienced record inflows and fixed-income funds also saw demand pick up.
However, the UK’s low valuations both relative to other markets and to its historic long-run average mean there is a compelling reason for long-term investors to give the UK another look, regardless of political incentives.
Charles Younes is deputy chief investment officer at FE Investments
