UK equities draw renewed interest as investors target ‘generational’ valuation opportunity – London Business News

The UK is increasingly being viewed as an attractive destination for active equity investors, with low valuations, resilient corporate earnings and the prospect of long-term growth prompting fund selectors to increase their exposure to British stocks.

More than nine in 10 professional investors surveyed by Rathbones Asset Management described UK equities as representing a potential “generational valuation opportunity”, according to research covering independent financial advisers, discretionary fund managers and private bank fund selectors overseeing a combined £234bn in assets.

Of the 100 respondents surveyed, 88 per cent agreed with the proposition, while a further 5 per cent strongly agreed.

The findings suggest a continued shift in sentiment towards a market that has spent much of the past decade trading at a discount to international peers and suffering from persistent investor outflows.

Almost three-quarters of fund selectors surveyed said they had increased their overall allocation to UK equities during the past 12 months. Just 1 per cent had reduced their exposure, while a quarter had left allocations unchanged.

The survey also points to strong demand for active investment strategies, as investors seek to exploit valuation disparities between companies and sectors rather than relying solely on broad market indices.

Nearly three-quarters of respondents said they construct customised portfolios using individual shares directly. Only 6 per cent exclusively use passive index-tracking funds, while 3 per cent outsource their entire UK equity exposure to active fund managers.

A further one in seven respondents invest through managed direct share portfolios.

The preference for active strategies reflects growing concerns about the composition of the UK’s benchmark equity index, where a relatively small number of multinational companies account for a substantial proportion of total market capitalisation.

Mid-cap recovery trade

Investors are also increasingly focused on the FTSE 250, with UK mid-cap companies seen as one of the most promising potential catch-up trades for 2026.

Almost three-quarters of respondents said they were likely to increase their allocation to UK mid-caps during the year, while a further 25 per cent said they were very likely to do so.

The FTSE 250 is generally regarded as providing greater exposure to the domestic British economy than the internationally focused FTSE 100, making it potentially more sensitive to any improvement in UK economic growth, consumer confidence and business investment.

However, the survey indicates that investors remain conscious of structural risks in the UK’s largest equity index.

Just ten companies, including Shell, HSBC and AstraZeneca, account for more than half of the FTSE 100’s total market capitalisation.

Sixteen per cent of respondents said they were critically concerned that the index had become too concentrated and intended to move client money away from passive strategies towards active, concentrated or mid-cap managers.

A further 72 per cent said they were moderately concerned and would continue to monitor the issue closely.

Those investors nevertheless acknowledged that many of the FTSE 100’s largest constituents offer strong dividend yields and remain well suited to client portfolios.

Only 12 per cent regarded concentration as a relatively minor concern, arguing that the dominance of mega-cap companies is a feature of equity markets globally rather than a problem unique to Britain.

They also pointed to the international nature of the UK’s largest listed companies, whose global operations provide diversification beyond the domestic economy and reduce exposure to purely British economic risks.

The survey comes amid a broader reassessment of the UK equity market, where relatively low valuations have increasingly attracted attention from international investors and private equity groups.

For active managers, the combination of discounted share prices and wide dispersion between company valuations has created an environment in which stock selection could become increasingly important.

The challenge for the UK market will be whether renewed interest from professional investors translates into sustained inflows after years in which British equities have lagged behind US technology stocks and other international markets.

Rathbones’ research suggests that, at least among professional fund selectors, sentiment is beginning to turn.

With investors increasingly looking beyond the concentration of the FTSE 100 and towards smaller and mid-sized companies, the UK’s valuation discount may be creating opportunities for those willing to take a more active approach to the market.