It didn’t quite match up to the US technology sector, but 2024 was a decent year for UK active managers. This is particularly true given the inauspicious backdrop of constant outflows and a feeble economy.
However, with the market still cheap, there is the potential for the UK market to build self-sustaining momentum in the year ahead.
The average UK Equity Income fund is up 8.9%, with the average UK All Companies fund just behind at 8.4%. UK Smaller Companies have started to recover from their long run of weakness, rising 6.7%. Active funds have generally outpaced the major indices, with the FTSE All Share up 4.7% for the year to date. At a tough time, it feels like a creditable performance.
Interest-rate cuts have helped, undoubtedly, but here too, the Bank of England has been notably stingier than the Federal Reserve or European Central Bank. There may have been tailwinds, but they have been more powerful for other stock markets.
There is potential for the UK market to build self-sustaining momentum in the year ahead
The relative strength of the UK market has had a few important drivers. It has been – and still is – very cheap. Richard Knight, manager on the Allianz UK Listed Opportunities fund, says the UK market is “trading well below its peak valuation, and there is a huge degree of mispricing beneath the aggregate market level”.
There has also been an enormous amount of merger and acquisition activity that has helped support prices. Alex Wright, portfolio manager of Fidelity Special Values Trust, says: “Although the UK market continues to remain largely unloved by domestic investors, its attractive valuations are being recognised by other market participants such as overseas corporates and private equity firms.”
Dealogic data shows that the value of mergers and acquisitions involving UK companies, whether buying or selling, has hit $306.3bn so far this year, a 57% increase on the same period last year.
The other area of support for the UK market has been buybacks. Andy Marsh, fund manager on the Artemis Income fund, thinks this will continue to support UK equities in the year ahead, though may not be as significant as it has been in 2024.
“We think we’ve been through a very interesting time in the UK stock market where share buybacks have driven a lot of stock market appreciation, particularly in sectors like banks. We think we’ll see a more balanced profile of returns over the next 12 months, with both dividends and share buybacks driving returns.
“Alongside that, we’re actually seeing improving growth prospects for some of our companies, reflecting the opportunities not only to distribute cash to us as shareholders, but also to invest and grow.”
For 2025, there are plenty of reasons to be cheerful about the UK stock market – partly because everyone has been so miserable about it.
As Knight says: “We are starting from a low base of low expectations and poor sentiment towards both the economy and particularly a UK stock market that has suffered persistent outflows for many years. We have seen in the past how market prices can move extremely quickly when sentiment and flows turn.”
For 2025, there are plenty of reasons to be cheerful about the UK stock market
Then again, investors could have said the same thing a year ago. Wright admits that he is surprised that the valuation gap between the UK and other global markets has not started to close. Almost all of the share price appreciation in 2024 has come from earnings growth, rather than a re-rating.
A revival of confidence is needed to achieve self-sustaining momentum in UK equities. In October, UK All Companies funds saw £735m of outflows and UK Equity Income £393m. For the UK All Companies sector, this is on top of £582m in September, and £629m in August.
Nevertheless, there was a spot of good news more recently. Calastone data for November shows funds investing in UK equities saw net inflows for the first time since May 2021, with £317m added to UK funds. Admittedly, there is some way to go to recapture the £25.3bn that’s been lost, but it is a start.
In the meantime, active managers continue to find an abundance of opportunity in the UK market. Wright, for example, likes financials, “given attractive valuations, a more conducive backdrop and plenty of opportunities with idiosyncratic factors driving their growth”.
He has been finding new ideas in cyclical areas such as industrials, advertising and staffing, and has also added back into select real estate and housing-related names, where demand appears to be stabilising and valuations remain low. He’s been adding to a number of consumer staples businesses and utilities on weakness and has also been adding to smaller companies.
Active managers continue to find an abundance of opportunity in the UK market
The value in smaller companies is a common refrain. Guido Dacie-Lombardo, manager on the WS Montanaro UK Income fund, says: “For those of us dedicated to smaller companies, it’s been a challenging period. However, we see opportunity in this underappreciated sector — less attention heightens the chance of discovering a hidden gem.
“UK small-cap valuations remain attractive, with the sector having outperformed over the past 12 months, suggesting that the worst may be behind us. The Shiller P/E ratio points to potentially strong returns for small-caps over the next five years.”
All the pieces are in place for the UK to realise its potential in 2025, and catch up with some of its peers on valuation. It has a more stable political backdrop, cheap valuations, a tailwind from M&A, dividends and share buybacks. Now it just needs investor confidence to return.
Darius McDermott is managing director of FundCalibre and Chelsea Financial Services
