Are UK Stocks Poised for a Comeback?

Introduction

For several years, the UK stock market has been undervalued due to economic and political concerns, but sentiment is now turning, offering compelling reasons for optimism. A trio of positive factors is converging to support a potential resurgence in UK stocks: the momentum from recent trade deals with key partners, a favorable macro backdrop driven by European fiscal programs and lower interest rates, and attractive valuations that may spark a pickup in M&A activity and dividend yields. As international investors take notice of these developments, the UK's defensive and value-oriented stock market, with its strong representation of mining, banking, and consumer staples sectors, is poised to regain its appeal.

(1)   New trade deals: Reducing uncertainty, unlocking growth

The UK has secured a series of strategic trade agreements over the past 24 months, poised to benefit domestic firms across various sectors. These deals include:

US - The UK secured a landmark trade deal with the US on May 8, 2025, exempting or reducing tariffs on key exports such as steel, aluminium, and cars. In exchange, the UK increased access to its market for US goods and services. The deal builds on the UK-US Atlantic Declaration (2023) and provides UK firms with access to US Inflation Reduction Act funding and supply chains, boosting trade and economic ties between the two nations.

India - A comprehensive economic and trade agreement with India on May 6, 2025, which aims to increase bilateral trade by £25.5 billion annually, boost UK GDP by £4.8 billion, and increase wages by £2.2 billion per year by 2040.

EU - A "Post-Brexit Reset" with the European Union on May 19, 2025, which is expected to add £9 billion to the British economy by 2040, and includes a defense and security pact, cooperation on fisheries and agriculture, and access to EU procurements.

Asia-Pacific - Accession to the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) in 2024, which provides access to 11 high-growth Pacific economies with a combined GDP of £12 trillion.

These agreements are expected to reduce uncertainty, unlock growth, and increase trade opportunities for UK firms, ultimately enhancing long-term export prospects for key sectors such as aerospace, pharma, defence, engineering, and financial services, and contributing to the UK's improving economic outlook.

(2) Favorable Macro Conditions: European Fiscal Stimulus and Falling Rates

The UK's macroeconomic conditions have stabilized in 2025, following a period of high uncertainty. This improving macro backdrop is driven by European fiscal programs and supported by lower interest rates. Key indicators include:

i. UK Inflation rose to 3.8% year-over-year in July, according to data released on 20 June, fueled by faster-than-expected rise in airfare prices. This leaves inflation well above the Bank of England (BoE) target of 2%, but nonetheless the BoE cut the base interest rate to 4.0% on 7^th August, taking the borrowing cost to the lowest level for more than two years as it remains confident on the downward-trending trajectory of inflation. Andrew Bailey, governor of the BoE said interest rates were still on a downward path and any future cut will be made gradually and carefully.

Annual % Change in UK CPI in last 20 years.

Source: BNP Paribas Wealth Management, Bloomberg data as of 20.08.2025.

The lower rates should help support the UK economy more broadly. It may also support UK equity valuation multiples, benefiting high-yielding segments of the market, such as utilities, REITs, and consumer staples. There is also the element of the weaker GBP, which could support earnings.

ii. UK GDP growth is forecast to reach 1.1% for the year, a recovery from stagnation in 2023-2024.

iii. The European fiscal stimulus, including a significant increase in defense spending, is expected to have a positive impact on the UK economy as well.

(3)   UK Stocks Trading at a Multi-Decade Relative Discount

UK equities remain some of the cheapest in developed markets, as may be illustrated below versus the MSCI World and the Stoxx Europe 600.

The FTSE 100 Index trades at approximately 12.6 times forward earnings estimates for 2026, compares to around 14.1 times for the Euro Stoxx 600, and 21.5 times for the S&P 500.

Source: BNP Paribas Wealth Management, Bloomberg data as of 20.08.2025.

The FTSE 100 also offers a dividend yield of 3.6%, which is significantly higher than the global average of around 1.8% (MSCI World).

Valuation Triggers M&A Activity: The UK's attractive valuation discount is driving M&A activity, as strategic investors take advantage of undervalued assets. Notable deals this year include:

-          Spectris plc, acquired by KKR in August for £4.2 billion

-          Pension Insurance Corporation, acquired by Athora in July for £5.7 billion

-          Direct Line Group, purchased by Aviva on July 1st for £3.7 billion

-          Just Group plc, taken over by Brookfield Wealth Solutions in June for £2.4 billion

-          Wincanton plc, acquired by GXO Logistics in June for £762 million

Conclusion

The UK market's relatively cheap valuations in our view could offer a compelling entry point, while newly minted trade deals are potentially opening new business avenues for UK companies. Furthermore, shifts in defence and industrial policy are favouring UK businesses, and a stable economic environment could help them prosper.

The main risks for UK stocks should be the same risks as those for equities globally, that is the risk of the global economy slowing down unexpectedly, a worsening political environment domestically or abroad with trade partners, as well as potential the worsening of investor confidence in the UK. 

This article is brought to you by the Advisory Solutions Team.