UK equities: Stronger sterling and stabilising flows signal sentiment shift
Portfolio Manager Indriatti Van Hien believes that despite geopolitical tensions and fiscal uncertainties, stabilising capital flows and easing inflationary pressures offer a promising outlook for UK equities.
4 minute read
Improving sentiment and strengthening sterling
Recent trends indicate a shift in sentiment towards the UK, reflected in a stronger pound sterling against the US dollar. Flow data echoes this positive sentiment, with flows by global investors from UK equity funds beginning to stabilise after three years of heavy outflows.1 2021 was the last year that saw significant inflows into UK equities so this is an encouraging sign.
Catalysts for growth: Trade deals and political stability
A key catalyst for the UK market is the potential for a significant re-rating, spurred by a reduction in the political risk premium. The UK has successfully announced trade agreements with major trading partners, including the US, India, and crucially, Europe. These agreements reset our trading relationships and are testament to the benefits of a stable government with a robust majority.
Another positive driver is the prospect of further interest rate cuts. Markets are currently pricing in two more rate reductions this year2, which could greatly benefit some of the more domestically-focused, medium sized companies that make up the FTSE 250 Index. Given the short duration of most UK mortgages (typically less than 5-year fixed rates), this index, with its exposure to interest-rate sensitive sectors such as financials, retailers and property, acts as a leveraged play on interest rate reductions, potentially leading to significant market gains.
Navigating risks and opportunities
Despite these favourable conditions, the UK market faces potential risks, particularly as we approach a period of speculation regarding taxes leading up to the Autumn statement. The Chancellor of the Exchequer will likely seek to rebuild fiscal headroom, which may introduce some uncertainty.
However, lower oil prices, aided by a weaker dollar, have been advantageous for the UK, enhancing consumer confidence and spending power.
A potential risk to monitor is the possibility of an external inflation shock, which could prevent interest rates and bond yields from declining as expected. A sharp jump to utility bills in spring caused inflation figures to rise but these are expected to drop out of year-on-year comparisons as the months progress.
UK Consensus economic forecasts
| 2024 | 2025e | 2026e | |
| Real GDP growth (year-on-year % change ) | 1.1 | 1.1 | 1.2 |
| Inflation CPI (year-on-year % change) | 2.5 | 3.2 | 2.4 |
| Fiscal balance (government borrowing in a fiscal year as % of GDP) | -5.2 | -4.3 | -3.7 |
| USD to GBP exchange rate (eg in 2024 $1.25 = £1) | 1.25 | 1.36 | 1.40 |
Source: Bloomberg, composite of forecasts from economists, as at 22 July 2025. e = estimates. Real GDP growth = gross domestic product adjusted for inflation. GDP is a measure of the size of the economy. CPI = Consumer Price Index, a measure of inflation. The fiscal year in the UK runs from April to March each year, a negative fiscal balance figure indicates the government spent more than it received and had to borrow. There is no guarantee that past trends will continue, or forecasts will be realised
Within UK equities, after a challenging decade for UK smaller companies, marked by uncertainty since Brexit, there is a strong case for a turnaround, given that smaller companies have historically shown a tendency to outperform following periods of economic disruption.
Geopolitical considerations and shifting market dynamics
Geopolitical challenges remain persistent, with unresolved conflicts in Ukraine and the Middle East and ongoing tensions between China and the US. This year, however, is distinguished by the emerging challenge to US exceptionalism, as doubts about the nation’s moral and economic leadership grow. This scepticism has contributed to the weaker dollar and a potential shift in foreign investment patterns, indirectly benefiting the UK.
Simultaneously, the UK’s political landscape is stabilising, with inflationary pressures easing, signalling a reversal of the challenges that previously defined UK exceptionalism.
In conclusion, we believe that improving sentiment, strategic trade agreements, and favourable economic trends mean UK equities are well-positioned to capitalise on the evolving market environment.
1Source: EPFR, Haver Analytics, Goldman Sachs Investment Research, calendarised flows from global investors into UK equity funds, 31 May 2025.
2Source: Bloomberg, World Interest Rate Probability estimates, 18 July 2025.
These are the views of the author at the time of publication and may differ from the views of other individuals/teams at Janus Henderson Investors. References made to individual securities do not constitute a recommendation to buy, sell or hold any security, investment strategy or market sector, and should not be assumed to be profitable. Janus Henderson Investors, its affiliated advisor, or its employees, may have a position in the securities mentioned.
Past performance does not predict future returns. The value of an investment and the income from it can fall as well as rise and you may not get back the amount originally invested.
The information in this article does not qualify as an investment recommendation.
There is no guarantee that past trends will continue, or forecasts will be realised.
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