Don’t overlook UK stocks in 2026
The UK stock market has long been shunned by retail investors, as the AI boom, inflation woes and gloomy economic conditions spark the search for greater returns in overseas markets, particularly the US.
While this narrative has held back many investors from tapping into the UK, the London index has bounced back in 2025, with those who failed to notice the market’s potential missing out on 20 per cent gains from equities.
The FTSE 100 is up 17.6 per cent this year to date, reaching 9,718 pence, as the government continues to encourage Brits to invest in UK stocks while overseas investors are eyeing the market for its stable returns from sectors such as banking.
In comparison, the S&P 500 is up just 16.7 per cent, despite the rush for AI stocks, while the Cac is up only 8.9 per cent this year to date.
According to investment firm Morningstar’s 2026 outlook, the index is poised to become an increasingly “attractive destination” for investors in 2026.
Mike Coop, chief investment officer of EMEA at Morningstar Wealth, said: “Investors have largely overlooked the UK, with Brexit fallout, ‘AI mania’ and the de-risking of UK defined benefit schemes dampening returns and deterring investor interest.
“However, the market is turning the corner this year and is primed for outperformance in 2026.”
International diversification
While many domestic investors have blamed economic challenges for their decision not to invest in UK stocks, the market is more diversified than investors realise.
Approximately three quarters of the FTSE 100 generates returns overseas, spread across the US, Europe and emerging markets, meaning a vast amount of revenue is detached from the UK economy, or its political dramas.
While the index is greatly concentrated, with the top 10 performing stocks making up roughly 43 per cent of total market cap, unlike the US which is mainly centred on AI, the companies span a range of sectors.
This includes pharmaceuticals, defence, energy and banking, with consumer goods company Unilever generating half of its revenue in emerging markets, while FTSE darling Astrazeneca generated 40 per cent of total revenue in the US in 2024.
Small caps and buybacks
Investment managers are identifying increasing opportunities in the UK small cap space, with some hailing the segment as undervalued “hidden gems”.
Small caps have struggled in recent years, weighed down by weak investor sentiment and a lack of inflows, resulting in valuations hitting significant lows.
However, investors can capitalise on these undervalued prices, as small caps are able to develop and grow in value where large companies might struggle to hit fresh highs.
Small caps mainly operate in niche industries, such as biotech and clean energy, allowing quick innovation and they tend to be overlooked by analysts, allowing investors who spot the undervalued stocks to take advantage before others notice.
Institutional investors are increasingly taking note of UK small caps, with soft drinks firm Britvic being acquired by Carlsberg in January, while cybersecurity firm Darktrace was taken over by US private equity giant Thoma Bravo.
Other UK companies are also showing confidence in their future outlook by initiating aggressive share buyback programmes, ranging from Jet2 to HSBC, allowing them to return excess cash to shareholders and increase their overall share price.
Coop said: “This shift is driven by greater political stability, exceptional value opportunities, and the quality of global businesses… alongside high-quality, less cyclical consumer staples and healthcare companies.”
Budget changes
The market has also been subjected to a major shake up as Chancellor Rachel Reeves unveiled a three-year stamp duty holiday for new London listings in last week’s Autumn Budget.
The Treasury’s plans will drop the 0.5 per cent rate paid by investors upon purchasing shares in newly listed companies following their IPO.
City figures have long been urging the government to scrap stamp duty in hopes it will assist the long suffering market, which has been losing listings to oversea markets which offer greater tax incentives and regulatory environments.
The market has begun to claw its way back from one of the worst IPO droughts seen in years, with just £184m raised in the first nine months of the year, compared to the approximate £40bn raised by the US in the same period.