What’s a country got to do to get noticed? Fastest growth in the G7, low valuations, high dividends, a perfect foil to AI volatility, yet the UK still can’t grab the attention of investors. Might it finally have reached a point where it can no longer be ignored?
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The recent UK economic data took analysts by surprise. The country recorded GDP growth of 0.3% for June and 0.4% for the quarter. That puts it at the top of the G7*. Plenty of economists were quick to find reasons why it wasn’t really that good after all – it was the World Cup effect, hot weather, seasonal anomalies – but after growth of 0.6% in the first quarter, even they were starting to admit that the UK might be turning a corner.
A boost for smaller companies?
This doesn’t necessarily affect the UK stock market, where a lot of earnings come from overseas, but it might help improve the fragile sentiment towards the UK stock market. It may be another reason to give the UK stock market another look, and particularly its more domestically-oriented small and mid-cap companies.
There is also the prospect of greater political stability. This has been a dangerous assumption in recent years, but there remains a possibility that Andy Burnham will bring some steadiness to the UK government. Simon Murphy, manager of the VT Tyndall Unconstrained UK Income fund, says: “Stability remains the key to an improving outlook here in the UK, and on that front, we note the relatively smooth transition of power within the Labour Party to our new Prime Minister Andy Burnham.”
New Chancellor John Healey gave some cause for cheer when he told a group of business leaders: “I’m just as concerned about the cost of business as I am about the cost of living, tax, energy, supply chain costs and labour. I know that businesses large and small have felt really squeezed.” This gave some hope that his first budget in October would not include more punitive taxes on UK companies.
All these positive signals have gone largely unnoticed by investors. While there has been some slowing of outflows from UK funds**, there has been no sign of any surge in enthusiasm. Corporate buyers, however, can’t get enough of UK companies. There have been nine bids for UK companies in July alone, including household names such as Rotork, Mitie and easyJet***. At the same time, companies have been buying their own shares in record numbers, demonstrating their confidence on the outlook.
Dr Paul Jourdan, manager of the WS Amati UK Listed Smaller Companies fund, says: “The UK market continues to attract interest from overseas corporates and private equity. Over $90 billion has been spent on the acquisition of UK-listed companies so far during 2026. On average, buyers are prepared to pay a 40% premium to the share price.”
Why is there such an enthusiasm gap between corporate buyers and ordinary investors? Corporate buyers know a bargain when they see one. They see they can get high-quality assets at low valuations and are snapping them up while they can. In contrast, most investors are still more concerned with what’s happening with AI than the under-the-radar UK.
The UK isn’t devoid of AI opportunities
It is true that the UK does not offer the type of technology exposure available from the US or Asian markets. Nevertheless, stock pickers can find businesses with AI exposure. Alex Wright, manager of the Fidelity Special Situations fund, says: “The portfolio has exposure to businesses that are benefiting from AI-related investment; Keller, for example, continues to benefit from demand linked to data centre construction in the US. At the same time, we are closely assessing businesses whose competitive positions could become more uncertain as AI develops and the market has become overly pessimistic, creating an attractive entry point.”
However, the superpower of the UK market may be that it is not as exposed to the AI trade and therefore provides good diversification against the high valuations and volatility of the global technology sector. Alex adds: “Valuations remain at a significant discount to other developed markets, and we continue to find companies where the market has become overly pessimistic and where we believe positive change is not yet reflected in share prices.”
The potential for positive surprises
Simon Murphy agrees: “We are of the view that it will not take much, given the prevailing negative sentiment, for the UK to start experiencing positive surprises.” These low valuations give the UK stock market a significant cushion against market volatility. The FTSE 100 proved relatively immune to the global stock market sell-off in July, for example.
There has been some recovery in UK stock markets already. The FTSE 100 has almost matched the S&P 500 over the past 12 months^. More recently, there has also been some recovery in out-of-favour small and mid-cap companies. Dividend yields are high across the board – 3.1% for the FTSE 100 and FTSE 250 and 3.8% for the FTSE Small Cap^^. Investors are paid to wait for better times in the UK stock market.
Is it time to reappraise the UK?
The UK has its problems, but so do all developed markets. Investors have grown too used to being pessimistic about the UK. At the very least, UK funds can bring some stability to a portfolio during volatile periods for financial markets and a chunky dividend. At best, investors may finally start to reappraise unloved UK equities and give them the valuations they deserve.
