The UK has spent much of the past decade being treated as a problem to be managed rather than a market to be invested in. Political noise, economic uncertainty and periods of weak relative performance made it easy to reduce exposure or look elsewhere.
That narrative, however, risks missing how the opportunity set has evolved.
2025 was a strong year for UK equities, with the FTSE All-Share returning just over 10% in total return terms, helped by improving earnings expectations, resilient dividends and renewed interest from global investors seeking diversification away from a highly concentrated US market, rather than a wholesale re-rating of the UK itself.
From a portfolio perspective, the more useful question is not whether the UK should dominate allocations, but whether it should be ignored altogether. We see five reasons why UK exposure still earns a place in a well-diversified portfolio.
1. Diversification has become more valuable, not less
Global equity portfolios have become increasingly concentrated, particularly around a small group of large US growth stocks. While that concentration has been rewarding, it has also increased exposure to valuation risk and shifts in sentiment.
UK equities offer a different mix. FTSE 100 companies generate around 75% of revenues overseas, reflecting the global nature of the index across sectors such as energy, pharmaceuticals, consumer staples and financials.
Maintaining UK exposure can therefore help reduce concentration risk while retaining participation in global earnings
The FTSE 250, while more domestically oriented, still derives around 45–50% of revenues internationally, offering exposure to global growth with a greater sensitivity to the UK economic cycle.
Maintaining UK exposure can therefore help reduce concentration risk while retaining participation in global earnings, particularly at a time when many investors are deliberately broadening allocations beyond the US.
2. An improving domestic backdrop removes a key headwind
The UK is now well past the most restrictive phase of monetary policy. Inflation has fallen materially from its peak, and the debate has shifted from how high rates need to go to how quickly they might come down.
Markets are currently pricing two to three Bank of England rate cuts during 2026, reflecting easing inflation pressures and slowing wage growth. While the precise timing remains uncertain, the direction of travel is clearer than it has been for several years.
When bonds provide a reasonable return in their own right, investors are no longer forced to rely on equities for growth and income
This matters particularly for domestically focused, growth-sensitive parts of the market, such as UK housebuilders, consumer discretionary companies, smaller banks and mid-cap industrials.
These areas have faced sustained pressure from higher borrowing costs, weak confidence and subdued investment. Lower rates do not transform the growth outlook overnight, but they do remove a significant headwind that has weighed on parts of the UK market for some time.
3. Bonds are doing their job again
One of the most important changes in the investment landscape has been the return of income. UK 10-year gilt yields are currently around 4.1–4.3%, levels that compensate investors for inflation and duration risk and restore bonds’ role as a genuine portfolio diversifier rather than a theoretical one.
This has important implications for portfolio construction. When bonds provide a reasonable return in their own right, investors are no longer forced to rely solely on equities for growth and income.
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That flexibility supports more resilient portfolios and allows risk to be taken more selectively, particularly in equity markets where valuations are higher.
For UK-based investors, gilts also provide a natural hedge against domestic economic risks and pension or liability-linked objectives.
4. The fiscal picture is stabilising, relative to expectations
The UK’s public finances remain constrained, but recent data have shown signs of stabilisation. December 2025 public sector borrowing came in below market expectations, supported by stronger tax receipts and resilient employment.
For markets, this distinction matters. Asset performance depends not only on outcomes versus history, but also on outcomes versus expectations. A reduction in negative fiscal surprises helps lower uncertainty and supports confidence in UK assets, particularly in gilt markets.
In a world where many assets already assume good news, the UK stands out for assuming very little at all
Sterling also plays a role here. While not a one-way bet, a more stable fiscal outlook reduces downside currency risk, which can be supportive for international investors allocating to UK assets.
5. Valuations already reflect low expectations
UK assets continue to trade at a discount to global peers. The FTSE All-Share trades on a forward price-to-earnings ratio of around 11–12x, compared with 19–20x for the MSCI World and over 21x for the S&P 500. Dividend yields of around 3.7–4.0% further distinguish the UK from other developed markets.
This valuation gap suggests pessimism is already well priced in. Historically, markets rarely need good news to perform reasonably when expectations are this low. They simply need outcomes to be less disappointing than feared.
A disciplined case for inclusion
The case for UK exposure is not about making a bold call or chasing a turnaround story. It is about diversification, income, valuation discipline and resilience.
In a world where many assets already assume good news, the UK stands out for assuming very little at all. From a portfolio construction perspective, that can still be a useful place to be.
Eleanor Ingilby is a senior portfolio manager and head of High Net Worth at Atomos
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