We will find out soon whether Andy Burnham will face a contest for the leadership of the Labour Party or take office unopposed. Either way, it makes little difference now. One way or another, he is likely to be our next prime minister before the end of the summer.

There are some ways in which Andy Burnham will be an improvement on the outgoing Keir Starmer. He is a better communicator and more personable. As mayor of Manchester, he is untainted by the failures of the last two years and can make a fresh start. Perhaps best of all, he can get rid of the hapless Rachel Reeves as chancellor and replace her with someone less obviously out of their depth and with at least some grasp on how businesses operate and the challenges they face. Temporarily at least, this may start to lift Labour's dismal poll ratings.

There's a problem, however. Prime minister Burnham will be heading straight into a financial crisis. Britain's economic outlook keeps on getting worse and worse. At the end of last week, we learned that government borrowing in May came in way above forecast, with a 30% year-on-year rise. For the month, government spending was up by 7% year on year, while tax receipts, even with record increases, were up by just 4% (it is hard to see much sign of the “neoliberalism” Burnham complains about in those figures). Growth stagnated last month, despite all the extra spending the government has thrown at the economy. Unemployment is rising relentlessly, especially for young people, and the welfare bills are running out of control, with the number of working-age people on benefits above four million. All the warning signs for a crash are already flashing red.

Andy Burnham is only going to make things worse. It is hard to detect much in the way of a serious economic programme in the collection of soft-left soundbites that make up his standard stump speech. But insofar as he has one, it involves yet more borrowing and spending. He has promised to bring the utilities under greater state control but said nothing about how that would be paid for. He has promised to cut business rates for small companies and launch a massive programme of council-house building, without attaching any kind of a budget. And if Burnham has ever said anything about controlling public spending, especially the soaring welfare bill, he has kept it very quiet. Even if he only keeps a fraction of his spending promises, and it will be very hard to break all of them, then the deficit will keep climbing higher and higher.

Can Andy Burnham succeed as prime minister?

Even as the deficit rises, Andy Burnham has said almost nothing about how he intends to boost growth to pay for it all, nor has he made any attempt to bring business on board. Celebrity chef Tom Kerridge has backed him, but only because of his promise to reduce the rate of VAT on hospitality businesses to 10% (yet another unfunded promise). Other than that, Britain's major corporate leaders have remained silent. There is not going to be any wave of investment to welcome the new regime, nor is there likely to be any dramatic measures to encourage investment into the UK. In the background, Britain's financial position is steadily deteriorating. Very quickly, the markets are going to test the new government. Is it willing to cut welfare, or will it raise taxes to keep paying the £125 billion a year in interest on the national debt the country now has to pay? Traders will want to find out, and find out very quickly, and if the answer is no, then gilts will be sold off.

The last PM to take over from one who had been elected with a big majority was Liz Truss in 2022. We all know how that worked out – her lifespan in office was famously shorter than that of a lettuce. Burnham won't face quite the same set of challenges, nor is he likely to attempt anything as risky as the mini-budget that led to her unravelling. Even so, the British economy is in far worse condition than it was then, our debts are far higher and the bond markets already view us with suspicion. Andy Burnham will soon face the heat – and may well wilt as quickly as a lettuce.

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There’s an age-old investment adage that promotes the value of spending time in the market as opposed to trying to time the market.

Unless you’ve got a crystal ball that tells you exactly when certain markets or asset classes are going to rise or fall, you’re probably better off investing smaller amounts on a regular basis, referred to as pound cost averaging. This smooths out any highs and lows, allows you to pay less for your investments on average and can make the journey less volatile, if indeed that’s your desired experience – some investors may enjoy the thrill of trying to time market highs and lows with a lump sum.

Behavioural finance experts often suggest that as humans, we’re predisposed to certain biases, including selling our investments when performance starts to drop off, despite all the expert evidence telling us not to do that; it just crystallises any losses instead of giving your investments a chance to recover.

That said, investor confidence is at its highest in seven years despite a year defined by geopolitical instability, global trade tensions and market uncertainty.

An annual study of investor behaviour and sentiment from research and communications businesses AML Group and The Nursery Research & Planning, The Investor Index 2026, showed investor confidence reaching a new high.

The index – a composite measure of investors’ confidence, sense of control and how informed they feel about their financial decisions – is back well above pre-pandemic levels, surpassing the previous high of the AI boom in 2024.

“What’s particularly interesting is how normalised uncertainty appears to have become for investors,” said Nicola Wright, insights director at The Nursery Research & Planning.

“Confidence is no longer closely tied to calm market conditions. Investors seem increasingly comfortable making decisions in a world where disruption and volatility are seen as part of the backdrop rather than temporary events.”

Several reasons are likely feeding that confidence, according to Jason Hollands, managing director at investment platform Bestinvest.

These include overplayed concerns that the US was facing a recession (which has not materialised) and markets (being forward-looking) appearing to discount the risk of the Middle East conflict as temporary, despite it lasting longer than many had first expected. He believes the over-riding reason behind many investors’ optimism is around AI and the exceptional levels of capital expenditure being ploughed into the sector.

Investing during uncertain times

Confidence is informed by several factors, including attitude to risk, life stage and level of experience and the amount of money you have.

The survey found 84% of investors (defined as having £10,000 or more invested) near or in retirement feel confident their savings and investments will be sufficient. Confidence is also higher among those already retired, as opposed to those in planning stages, and among those with more than £250,000 invested.

While the index showed UK investors were putting their money where their mouths were – 50% increased their investment amounts compared with last year while 40% maintained the same levels despite an uncertain backdrop.

That faith in the market is supported by a willingness to pay a premium for more likelihood of returns, a priority alongside decent track records and user-friendly products.

The choices UK investors are making also indicate optimism, favouring equity funds on the whole, with a rising demand for exchange-traded funds (ETFs). In keeping with regular savings strategies, considering a diversified, long-term approach – such as looking at reliable large caps, high-quality fixed income and some uncorrelated real asset exposure – should help many investors, whatever their time horizon, weather any storms.

Hollands said the danger of buoyant markets is the risk of overconfidence or being swayed by casual conversations with people ‘down the pub’.

“A lot of DIY investors start off enthusiastically but over time their interest wanes and they tend to forget about their portfolio,” he said.

Asset allocation – checking if any position sizes need rebalancing to bring the overall investments in line with your intended risk profile and preferences – is something many self-directed investors tend to overlook. Many get excited about fund or stock ideas rather than looking at the bigger picture, he added.

“Try not to over-react to the last thing someone told you but also make sure you’re reviewing your portfolio at least a couple of times a year, at the same cadence. Having a well thought-through asset allocation is really important, which can then anchor you to making better decisions.”

Are you thinking about investing but not convinced yet?

Intenders, perhaps unsurprisingly, are more cautious. The Nursery and AML define this cohort as those with over £10,000 in savings or over £2,000 in savings and an income over £40,000 but also likely to invest in the next two years. These people are keen to invest but still waiting for a ‘trigger’ event.

Tending to listen to banks, family and friends rather than professional advisers, they are more anxious across the board compared to investors. They see property and savings as safer bets than stocks and shares, with fear of loss and risk aversion their main barriers to getting started.

Of this group, 41% worry they will lose money and 37% say it feels too risky. Yet 44% say low-risk options or better knowledge would get them over the line.

“One of the main reasons that a lot of people who’d like to invest don’t do it is they’re nervous about putting their money in at the wrong time, and then suddenly seeing a significant drawdown in the value of their investment. That can stop them investing full stop,” explained Hollands.

He said the way to overcome that was to take the pound cost averaging approach.

“By just investing a little often regularly, it takes the emotion out of it and also means that across a year, you can expect to smooth out some of the ups and downs that you see in the short term.”

He also urges even experienced investors to consider the benefits of this approach – it’s not just for beginners.

How to start investing during uncertain times

Bestinvest is seeing novice investors increasingly choose readymade portfolios rather than trying to build their own from scratch, selecting funds themselves.

Readymade portfolios are essentially multi-asset funds designed to cater to a range of risk profiles, which have become common across most DIY investment platforms, which have evolved their offerings to serve customers of all levels of experience.

“Readymade portfolios provide inexperienced investors with effectively a ‘one-stop shop’ managed investment solution, through a diversified selection of underlying funds selected by a portfolio manager and an asset allocation approach that is periodically rebalanced to stay in line with the risk profile,” said Hollands.

He also said that passive funds had become more popular, with novice investors increasingly putting relatively small amounts via regular savings into global tracker funds.

UK investors looking for income often concentrate on FTSE 100 companies. But it's not just the more defensive, established giants that can deliver attractive dividend yields; mid-sized and smaller companies can too. These smaller businesses tend to be more cyclical and faster growing, helping to drive earnings and dividend growth, which can boost total returns over time. “Time” is the word to emphasise there. Sometimes you have to wait for them to fulfil their exciting capital-growth potential. But if you've targeted good, well-managed companies paying out dividends, you know you're being paid to wait. This area of the market can go through difficult patches, but that can open up opportunities to buy at attractive prices and enhance the dividend rewards further.

It's in one of those difficult patches now. Smaller companies have substantially underperformed their large-cap peers. In my view, this is because smaller companies are more domestic in their exposure at a time when the UK economy is roughly flatlining. And they're more cyclical at a time when there are question marks about the global and UK economies. But this prolonged underperformance has arguably thrown up some interesting value opportunities. Here are three holdings within our multi-cap, income-focused Lowland Investment Company that we think illustrate the potential benefits for long-term investors willing to hunt among smaller companies, as well as larger ones, for dividend yield and potential capital growth.

Three UK smaller companies to consider

Marshalls (LSE: MSLH) makes building products such as paving stones and roofing materials. It's trading on less than ten times forecast earnings, on an earnings number that is depressed compared with its history. End markets, particularly in landscaping products, are challenged, but while you wait for things to pick up there is a dividend yield that is more than 5% and roughly twice covered by earnings. There are also divisions within the group that are more resilient. Its solar panels division, for example, has grown sales strongly in recent years.

Shaftesbury Capital (LSE: SHC) owns much of London's West End, including Covent Garden, Carnaby Street and Chinatown – a mix of retail, office and residential properties. It's trading on a roughly 40% discount to net asset value. The market is gloomy about property, but vacancy rates in this portfolio are very low. The dividend yield is more than 3% and the managers are targeting rental growth of 5%-7% a year. This should mean the company has the potential to grow that dividend sustainably to offset inflation.

Hilton Food Group (LSE: HFG) is a meat packer with customers globally, such as Tesco in the UK and Woolworths in Australia. It has struggled in recent years after expanding into adjacent areas, such as white fish and vegetarian food. But the current CEO seems to be shifting focus back to its core skills. The shares trade on a price-earnings ratio in the low teens and a dividend yield covered by earnings of more than 6%. Hilton is now investing in new growth opportunities. It's starting to work with Walmart in Canada, a venture that might eventually spin out to other countries covered by the supermarket chain. If people can feel confident the problems have been dealt with, they may get more excited about growth opportunities again.

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By European stock market standards, the size of the SpaceX initial public offering (IPO) will be breathtaking. The company is expected to be valued at between $1.75 trillion and $2 trillion, and given how frothy Wall Street is right now, it would hardly be a surprise if it went to a substantial premium on its first few days of trading. We can all question the valuation. The Starlink business that now provides internet access on flights is a clear money-spinner and it may be able to break into domestic broadband as well, but the plans for a colony on Mars look, to put it politely, a little optimistic. Even so, this is a huge business and a very successful one, and it has created a huge amount of value in a very short period of time.

It is far from alone. Anthropic, the company behind Claude AI, is reported to be planning an IPO in October, with a valuation of $1 trillion or perhaps more. Its rival OpenAI, the company behind ChatGPT, is also expected to list later this year, with a value of close to $1 trillion. There are slightly smaller companies just behind it. Last week, Cerebras, which makes AI chips, made its debut on Nasdaq, and after a first-day premium, saw its value soar to $95 billion. On the US market, incredible amounts of wealth are being created at dizzying speed. Anthropic is only five years old, OpenAI is ten (its profit-making unit only five) and although SpaceX was founded in 2002, it only really got going a decade ago.

The contrast with European stock markets is painful. SpaceX by itself will be worth almost as much as the whole of France's CAC-40 (valued at €2.6 trillion and falling rapidly as the value of LVMH slumps). It will be getting close to the entire value of Britain's FTSE 100, currently valued at £2.4 trillion, and SpaceX and Anthropic combined will certainly be worth more than all of the UK's 100 largest companies put together.

European stock markets need more mavericks like Elon Musk

The reason is clear. Very few new firms are being created. If you exclude mergers, the newest company on the CAC-40 is Eurofins Scientific, which was formed in 1987. Even where there are new companies, the best ones choose to list on Wall Street – the Cambridge-based chip designer ARM, for example, is now worth $220 billion, which would rank it as the third largest in the FTSE 100 if it had decided to list here.

Europe, including the UK, needs to realise how far behind it has fallen and start working out how to turn that around. First, it should radically reduce the taxes on start-ups to encourage more entrepreneurs. Britain has scaled back the break on capital-gains tax that anyone who started a new company used to benefit from, and most of Europe never had any concessions to start with. Instead, there is a constant stream of new wealth taxes and capital-gains taxes, with the Netherlands extraordinarily planning to tax capital gains before they have even been cashed in. No wonder there are far fewer start-ups and hence fewer giants ever emerge.

European stock markets should also roll back restrictions on growth industries such as AI and space. While the US has a booming space industry, Europe has a Space Act; while huge new AI businesses are created on the other side of the Atlantic, Europe is stuck with an AI Act. But there is no point in having a regulator if there isn't an industry to make rules for. There is still little sign that politicians in either Brussels or London realise how much damage has been done by trying to regulate industries before they have even begun.

Finally, Europe should relax the listing rule for entrepreneurs such as Elon Musk who want to keep control of companies. SpaceX will come in for a lot of criticism for allowing Musk so much control over the business and the $1 trillion pay package if he manages to create a thriving human colony on Mars. It doesn't follow Europe's governance rules. But so what? Entrepreneurs are often a little odd, and they are often control freaks, but they also have the drive and ambition to create huge new businesses. Europe could use fewer rules and more mavericks if it is to avoid turning into an investment backwater, with nothing more than a dull collection of very old companies.

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UK small caps have been left under-owned by investors' preferences for large-cap stocks in recent times, creating a significant valuation gap. However, as macroeconomic pressures stabilise and confidence returns, this gap is beginning to narrow. The strength of many UK small caps is becoming apparent. They are often more agile than their larger peers, operate in attractive niche markets and remain significantly under-researched – creating a fertile hunting ground for mispriced opportunities. We hold a concentrated portfolio of high-quality UK small caps, and take meaningful stakes and engage directly with management teams. This allows us to support long-term value creation and tune out short-term market noise. Across the portfolio, we are seeing a growing number of smaller companies reaching clear inflection points, yet share prices remain anchored to outdated narratives.

Three UK small caps to consider for your portfolio

The UK wealth-management sector continues to benefit from strong long-term structural tailwinds such as rising levels of household wealth and supportive government policies. Brooks Macdonald (LSE: BRK) looks like an interesting recovery story in that sector. The firm's recent transformation and investment initiatives are beginning to show results. This is complemented by rising momentum across its model portfolio service, which now represents 40% of assets and is growing at double digits. The company has recently returned to overall net asset growth, having now delivered two successive quarters of positive net flows. If sustained, this will show that management's efforts are paying off and could act as a catalyst for a substantial rerating. The firm could also become a takeover target. It is a valuable asset as a standalone platform, or in combination with another player.

Netcall (Aim: NET) also looks compelling. It is a leader in software related to customer engagement and business process automation, and the group serves industries including healthcare, local government and financial services. Its move to offering products from the cloud has transformed the business and accelerated top-line growth to double digits. It remains profitable and has a strong balance sheet. The investment case is being strengthened by AI. Netcall helps public-sector clients implement AI as part of broader efforts to automate services. Many of the relevant bodies lack in-house IT capabilities and therefore require a trusted partner to help them extract efficiency gains from new technology. This is where Netcall comes in, and its business strategy aligns directly with central government's push to digitise public services. The shares have fallen recently, caught up in the “SaaSpocalypse” narrative that AI will make many software providers obsolete. We think this misreads the situation. Netcall isn't being disrupted by AI – it is helping to deliver it.

Everplay (LSE: EVPL) is a developer and publisher of video games. Its model of acquiring and developing games made by independent producers limits the risks around development and improves the quality of earnings – 75%-90% of annual revenue is typically generated from a back catalogue of hundreds of titles, providing diversification and resilience. Recent weakness in the share price reflects concerns about AI's impact on the development of gaming. But Everplay's strength lies in identifying and acquiring successful intellectual property and managing it over time. If AI enables developers to create more content quickly and cheaply, this will increase the volume and make curation and selection even more valuable. Recent management changes support the investment case. We believe Everplay is a well-positioned, scaled player in a fragmented industry, with potential to consolidate further or eventually become an acquisition target.

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Five years ago there were lots of reports about how the finance industry was going to move from London to Paris, Amsterdam or Frankfurt. In the wake of Britain's departure from the European Union, the City would lose its role as the main hub in the finance industry and all the jobs and tax revenues it created. Deals would have to be made within the bloc, and trades would have to settle under EU rules, so there would be little space for a country outside the EU. The only real question was which major city on the continent would take London's place.

But traders and analysts can forget about freshly baked croissants for breakfast and two-hour lunch breaks. It turns out that the US mega-banks are not moving en masse to Paris after all. Last week, JPMorgan started moving some of its staff in Paris back to London. Its chief executive, Jamie Dimon, warned back in 2021 that the bank might well move all its European operations out of the City. Instead, it has been steadily increasing its headcount and building the biggest tower in Canary Wharf to house them all. Its plans to make Paris the centre of operations appear to have been quietly wound down.

It is not hard to understand why. President Emmanuel Macron's promises to carve out a special regime for global bankers have come to nothing. The “temporary” tax surcharge on anyone earning more than €250,000 a year – not much for a star banker at JPMorgan – has been extended for another year. With the government paralysed and a huge deficit to fix, France will have to put up taxes again.

Meanwhile, Amsterdam is about to become a no-go zone for investors. The Dutch city mounted a challenge to London that was every bit as serious as the one from Paris. With its long traditions in finance and a powerful stock market, it attracted a series of high-profile listings, including giants such as Universal Music. But now the Netherlands is planning to extend the capital gains tax at 36% even to unrealised gains. In effect, if your investments go up in value by 10% over the course of the year, you will have to pay a big chunk of that in tax, even if you have not yet cashed them in.

Even worse, you won't be able to claim any kind of refund or allowance if those same investments fall by 10% the following year. In effect, the state will confiscate 10% of your winnings, but it won't share in any of the losses. It will be the most punishing system of capital-gains taxation anywhere in the developed world. It is impossible to see how Amsterdam can survive as any sort of financial or business centre under that regime. As for Frankfurt, there is absolutely no sign of any banks moving to the city and the German economy remains stagnant despite the huge rise in government spending to try and get it growing again.

How the City of London can reclaim the crown

Add it all up, and this is the perfect moment for London to reclaim its place as Europe's main financial hub. There have been modest moves in the right direction. Some of the listing rules have been relaxed, the cap on bankers' bonuses has been lifted and a new junior market in “unquoted companies” has been created. We are promised more reforms in the King's speech later this month. It is a start, even if only a very modest one.

But there are also obstacles: higher income taxes, the ending of non-dom status for finance staff moving from abroad, some of the highest inheritance taxes in the world, and now a higher rate of tax on interest and dividend payments as well. It may well get worse in the next Budget. None of that will do anything to persuade any more bankers to move to this side of the Channel.

The government should be doing a lot more to help. It could introduce a new version of the non-dom regime, perhaps modelled on Italy's flat-rate tax scheme that has helped create a boom in Milan. It could turn the stock exchange into a genuinely light-touch regulatory centre for new listings. Finance remains one of the world's largest industries and one in which Britain has huge residual strengths. Brexit has not damaged it nearly as much as everyone predicted. But the City will have to work a lot harder if it is to reclaim its crown.

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Investing in UK small-cap stocks does not necessarily mean exposure to businesses struggling against larger rivals. On the contrary, we actively seek smaller companies that dominate niches. They may not be FTSE 100 giants, but they are leaders in their specialist areas, with the scale, data and strategic positioning to thrive. The UK small-cap sector is rich with such firms. Market leadership in a niche area confers several key advantages. It can enhance pricing power, which is especially valuable in today's inflationary environment, increasing the likelihood of profits. We place equal importance on competitive barriers and the structure of the industry in which the company operates. Without barriers to entry, competitors can swiftly erode profit margins even as demand grows. Here are three examples of smaller companies that we believe have an edge.

UK small-cap stocks to consider for your portfolio

MONY Group (LSE: MONY), owner of the MoneySuperMarket and Money Saving Expert brands, is one of the UK's market-leading price-comparison platforms. It may not be the largest in every category, but it has the broadest offering, which is important because by offering a multitude of products – for example, current accounts, broadband, energy, loans and travel insurance – MONY frequently interacts with its customers. Its rewards programme, SuperSaveClub, goes further in helping to convert a one-off transaction into a recurring revenue stream and reduces MONY's reliance on Google and television advertising. It is growing quickly: it had 2.1 million members and accounted for 16% of group revenues in 2025.

Concerns about the risks posed by AI have brought the shares down to attractive levels. There are also a number of barriers to entry that will help cement MONY's competitive advantages, including regulation, links to the multitude of insurers and brand strength. It says something that Amazon attempted to enter this market in 2022, but pulled out 15 months later.

Moonpig (LSE: MOON) is a UK small-cap stock that dominates the country's online greetings-cards market with a 70% share. That means data. Moonpig has more than 100 million customer reminders on its system, which it is using to convert one-off purchases into repeat business. Its subscription model, Moonpig Plus, has surpassed one million customers, and they are using the service not only to buy cards more often, but also to spend more by adding gifts. The business floated at an inflated price. Five years later, and with the share price about 50% lower, it now looks like a good investment.

Victorian Plumbing (LSE: VIC) is another market leader. Its acquisition of its (near) namesake Victoria Plum has cemented its strong market position, and the firm can now invest far more effectively in its brand. Its recent move to a new warehouse should enable it to scale, and it could double its sales within its existing infrastructure. Like Moonpig, Victorian Plumbing was a beneficiary of Covid and was overvalued at its initial public offering. More recently, the shares have been hit by concerns about UK consumer spending and its decision to invest in entering the homewares market. These concerns are temporary. The Iran conflict is pushing up inflation, delaying interest-rate cuts and has further eroded fragile consumer confidence. Nevertheless, consumer savings rates are high, and household debt-to-income levels are at a generational low. We see this as a strong platform for when consumers' confidence does recover.

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Against an uncertain global backdrop, British stocks have touched new highs in 2026, once again showing the UK's resilient nature when compared with other developed markets. As contrarian-minded value investors, we are firm believers in the maxim that “price is what you pay, value is what you get”, and the UK's outperformance has as much to do with the modest starting valuation of many of its companies as with its preponderance of resilient, cash-generative businesses. It's one of the reasons the UK remains a fertile hunting ground for those seeking out under-appreciated stocks that have fallen out of favour with investors but have the scope to deliver strong risk-adjusted returns for those willing to take a longer-term view. The following three companies are examples of businesses we think the market may be overlooking.

Speciality chemicals company Croda (LSE: CRDA) is a British stock with contrarian attractions. The shares are coming out of a period of deep underperformance after a confluence of issues served to undermine the business's former world-class reputation and history of high margins, good growth and attractive returns. End markets have proved tough and high levels of investment in exciting new pharmaceutical-oriented capabilities have yet to pay off. Nevertheless, over time we have become convinced that this business is far from broken and there is scope for substantial improvements in profitability on the back of an ambitious cost-reduction programme, well-invested assets and recovering demand. Shareholders can expect a market-beating yield of more than 4% while they wait.

Communications group WPP (LSE: WPP) is another British stock we think has reached a price that deeply underestimates the intrinsic value of the business. Under new leadership, the business is consolidating so as to leverage the enviable talent and technological prowess at its disposal. After a period of extended underperformance against a tough market backdrop, for the last two consecutive quarters, the company has led the market in winning new business. This supports our view that WPP has turned a corner and reinvigorated its competitiveness in the advertising and marketing business, where scale and data are all-important. There is clear evidence that the business is making real progress in transforming the group's structure, and ample cash on the balance sheet gives the firm options. The shares are trading on an exceptionally undemanding price/earnings ratio of less than five times and offer a yield of well over 6% for the next year, so investors will be well compensated for the risk.

Chesnara (LSE: CSN) is a lean, tightly run insurer led by a seasoned team that specialises in buying closed life-insurance books, often at big discounts to book value. These acquisitions generate reliable, long-term cash flows, boosted by disciplined cost control and a proven ability to make the most of business synergies. The result is a dividend that rises every year, giving Chesnara the strongest record of continuous growth in UK and European insurance. A transformational deal for HSBC's UK Life business last year lifted the group into the FTSE 250 and delivered a one-off 6% dividend hike. With more deals in sight, a conservative balance sheet and an 8%+ yield, Chesnara stands out as an attractive income play that many won't have considered.

When a business falls out of favour, it sometimes doesn't take much for sentiment to start improving. These British stocks are not without risk, but they could offer rich rewards for patient investors over time.

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Shell, BP, HSBC, AstraZeneca, British American Tobacco – nobody's idea of an exciting portfolio.

Yet a study of every UK-listed stock over the past 50 years found that the top ten wealth creators, including these five, captured nearly a third of all the real wealth generated by UK stocks. Thousands of listings came and went in that time. These stayed and compounded, and also sometimes feature in the most popular stocks purchased by DIY investors.

This makes the current anxiety about market concentration worth examining. The Magnificent 7 now account for 39% of the S&P 500. Passive fund assets have passed 50% of all US equity fund assets for the first time.

In his January 2026 shareholder letter, Terry Smith warned that the shift into index funds is 'laying the foundations of a major investment disaster', though he conceded he couldn't say when or how it would end.

It's an argument that resonates. When seven stocks dominate a major index, something feels uncomfortable. But three recent studies, covering UK and US equities over periods from 50 years to nearly a century, tell a different story. Wealth creation has always been concentrated in a tiny minority of companies. The question isn't whether your index is top-heavy. It's whether the alternative gives you better odds.

And on that, the evidence is striking.

Which UK stocks created the most wealth?

Only three per cent of UK stocks created all the wealth. A newly published, peer-reviewed study in the Journal of Asset Management quantifies what many investors suspect but few grasp in full. Jonathan Fletcher and Michael O'Connell at the University of Strathclyde examined every stock listed on the London Stock Exchange, the Unlisted Securities Market and AIM between 1975 and 2024. Their finding: just 3.1% of those companies generated all of the market's aggregate net wealth creation in real terms.

The names that did the heavy lifting won't surprise anyone. Shell, BP, HSBC, British American Tobacco, AstraZeneca, Rio Tinto, GlaxoSmithKline and Unilever – dull yet dependable.

The top 10 alone captured nearly a third of all aggregate wealth created. These weren't the stocks that made headlines; they were the ones that compounded quietly while the headline stocks came and went.

More than half of all UK stocks failed to beat Treasury Bills over their lifetimes. The median stock lost money after inflation: a lifetime real return of −13.9%. AIM, the market segment most associated with exciting growth stories and tax-efficient wrappers, produced negative aggregate net wealth of −£2.6 billion.

This isn't a UK anomaly. Hendrik Bessembinder at Arizona State University, whose 2018 study first documented the pattern in the US, has updated his data through 2022. Across nearly a century of American equities, just 4% of stocks accounted for all $55 trillion of net shareholder wealth creation. The remaining 96% collectively matched Treasury Bills at best.

Two different markets. Two different time periods. The same conclusion: equity wealth creation has always been radically concentrated. The few carry the many.

So when only 3% of stocks generate all the aggregate wealth, today's top-heavy indices aren't a distortion. They reflect how markets work. And if you're picking individual stocks, you're betting you can identify those winners before the fact, from a pool where the median outcome is a loss.

Avoiding market concentration actually made things worse

If concentration is structural, what happens when you try to fight it? Mark Kritzman of Windham Capital Management and MIT Sloan and David Turkington of State Street Associates set out to answer that in their recent paper - The Fallacy of Concentration.

They built a dynamic strategy that reduced equity exposure whenever market concentration was historically high and increased it when concentration fell. The result: lower returns, higher risk and less than half the cumulative wealth of staying invested.

The buy-and-hold investor earned a Sharpe ratio of 0.52. The concentration-avoider earned 0.39. Both held the same average equity exposure over the full period, at 67.8 per cent. The difference wasn't about courage or conviction. It was about fighting a feature of the market that turns out not to be a bug.

Large companies aren't just large. They're structurally less volatile. Kritzman and Turkington found that the biggest decile of S&P 500 stocks had annualised volatility of 19.2 per cent, compared with 28.8 per cent for the smallest. A market dominated by large companies is, counterintuitively, a calmer one.

Smith is not wrong that passive flows direct money mechanically toward the biggest stocks. That's how cap-weighted indexing works. But whether that mechanism exists matters less than whether the concentrated index is more dangerous than the concentrated stock-picking portfolio. On that, the evidence is clear.

Buy the whole book

The Fletcher and O'Connell data leaves stock pickers with an uncomfortable question. If the vast majority of listed companies destroy value over their lifetimes, picking individual stocks looks less like a skill contest and more like a raffle. The rational response isn't to study the tickets harder. It's to buy the whole book.

Terry Smith, of course, would disagree. But his own record is instructive. Fundsmith returned 0.8% in 2025 against 12.8% for the MSCI World - Smith’s fifth consecutive year of underperformance.

Laith Khalaf, head of investment analysis at AJ Bell, noted that the fund has now lagged its benchmark over both five and 10 years.

Khalaf's wider point is worth hearing too: “Fundsmith's earlier outperformance was partly flattered by the low interest rate environment that suited Smith's quality style. Now that tailwind has reversed, the structural headwinds facing stock pickers are harder to ignore.”

None of that reflects on Smith's intelligence or his process. It reflects the odds, and those odds don't bend for reputation.

Market concentration is worth understanding. It's worth watching. But the evidence from three studies spanning two markets and close to a century of data points the same way: the risk most investors should worry about isn't a top-heavy index. It's a portfolio that bets against the 3 per cent carrying everything else.

For most of us, the better odds are hiding in plain sight.

What is stopping the UK from investing? It's a mixture of three main factors, according to Henry MacLeod, co-head of digital distribution at BlackRock.

In this episode of MoneyWeek Talks, Kalpana Fitzpatrick speaks to Henry about the state of investing in the UK, how we can debunk myths about risk, and whether AI can help you become a better investor.

Watch the full episode on our YouTube channel or on any podcast platform.

About the podcast

MoneyWeek Talks is a podcast that helps you unlock the secrets to financial success. Editors Kalpana Fitzpatrick and Andrew Van Sickle are joined by influential guests – from CEOs and entrepreneurs to economists and policymakers – to share their top tips on managing money, investing wisely and building wealth.

Subscribe to the MoneyWeek Talks podcast and get ready to make it, keep it and spend it with confidence.

UK small-cap stocks haven't had an easy ride in recent years. With shifting interest rates and the outlook for the economy looking uncertain, many investors have gravitated towards the perceived safety of larger, more global companies instead. Look a little closer and a different picture emerges.

Across the UK small-cap market there are businesses continuing to grow steadily, strengthen their financial positions and build momentum. In many cases, this progress is being driven by long-term trends that are less dependent on the ups and downs of the wider economy. From infrastructure to healthcare and specialist services, these companies are benefiting from structural sources of demand that can support growth even in more challenging conditions.

The key is identifying those with the right foundations: scalable models, strong balance sheets and clear competitive advantages. The following three companies offer a good illustration of this.

Three UK small-cap stocks for your portfolio

Quartix Technologies (LSE: QTX) provides subscription-based vehicle-tracking systems that help small and medium-sized businesses monitor their fleets, then use that data to optimise routes and improve drivers' behaviour, helping to reduce costs and improve efficiency. The appeal for customers is that installation costs are quickly recouped through fuel savings and improved productivity, creating a clear and tangible return on investment. This supports strong customer retention as well as a dependable stream of recurring revenue.

With about 330,000 vehicles already connected to its platform and a growing international presence, Quartix has established a solid base, but there is still plenty of room for growth, especially outside the UK, where adoption remains relatively low. Its scalable, cloud-based platform and reputation for reliability and customer service give it an edge in a fragmented market.

Construction may not always seem like a predictable industry, but parts of the sector are underpinned by long-term government infrastructure spending, rather than short-term economic cycles. Galliford Try (LSE: GFRD) sits firmly in that camp, operating across areas such as schools, healthcare and water infrastructure.

Much of its work is tied to regulated, multi-year investment programmes, which provide strong visibility over future revenues and a steady project pipeline. In recent years, the firm has also become more selective in the work it takes on, helping smooth earnings and control risk. It has a strong balance sheet and is well placed to benefit from investment in public services.

Applied Nutrition (LSE: APN) is a UK-based sports nutrition and health company, which produces a range of wellness products, from protein powders to supplements. The business is vertically integrated, meaning that it makes the majority of its products in-house, giving it greater control over quality and costs.

Demand from health-conscious consumers is growing and the firm's ability to innovate and secure shelf space with key retailers has been an important driver of performance. The firm is well placed to build on this momentum, supported by a scalable model and exposure to a fast-growing market.

UK small-cap stocks are neglected, but that's often when the most interesting opportunities appear. Over time, small firms tend to grow faster than larger ones. Looking beyond the headlines and focusing on companies that are steadily improving can highlight opportunities others may be missing.

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Legal & General Group (LSE: LGEN) is one of the oldest companies in the UK. It's also one of the few remaining that formed part of the FTSE 100 at the time of its inception. The group is known among investors as a slow-and-steady beast that pays a consistent, relatively high dividend yield, but hardly does anything to get the pulse racing. That is starting to change as Legal & General transitions towards an asset-light, higher-margin, faster-growth business.

Legal & General's longevity is down to its business model: life insurance and long-term savings. It is one of the largest retirement, life-insurance, and annuity providers in the country, operating under strict rules to ensure management runs the business prudently with a long-term mindset.

This means the business is relatively boring compared with other blue chips – boring, but not unprofitable. Legal & General throws off cash and has established itself as one of the UK's top income stocks, with a yield consistently in the high single digits.

Usually, such a high dividend would be a warning sign. Yields significantly higher than the market average usually indicate that investors believe the payout is unsustainable. In this case, however, the high yield and low valuation are more a reflection of the market misunderstanding the business model.

Legal & General is a dominant leader in the bulk-purchase annuity market and the largest provider of term life insurance in the UK. Both of these products are financially complex, involving multi-decade liabilities and, as a result, are heavily regulated.

There are strict rules governing how much capital the company must hold to meet its liabilities. Even for the most sophisticated financial analysts, determining how much revenue a bulk-annuity purchase or a term life-insurance product will generate over ten or 20 years is not straightforward.

You only need look at the firm's peers to understand this isn't a problem affecting only Legal & General. Chesnara, Standard Life (formerly Phoenix) and Just Group are all cheap and offer high yields. The problem is so bad that private-equity group Brookfield recently offered a 75% premium to buy Just. Standard Life has also decided to rename the company to focus on its more visible pension products, moving away from the old Phoenix brand, which was known as a closed-book consolidator.

This isn't just a problem in the UK. In the US, Brighthouse Financial (originally spun off from MetLife in 2017 to focus on retail life insurance) was acquired last year for a 55% premium. Athene was acquired by private-equity giant Apollo in 2022 for a 20% premium. Athene-backed Athora is in the process of acquiring the UK's Pension Insurance Corporation for £5.7 billion.

Jackson Financial, formerly the US arm of London-listed Prudential, spun off in 2021, has been so neglected that management has been able to acquire 40% of the outstanding shares in the past five years from cash flow as well as distributing a handsome dividend.

Times are changing, and so is Legal & General

Legal & General is becoming increasingly less reliant on its bulk-annuity, pension-buyout and life-insurance businesses. Instead, its asset-management and retail arms are driving an increasing share of profit. With £1.2 trillion of assets under management, Legal & General is one of the UK's largest investment-management firms.

It manages the funds attached to the defined-contribution (DC) pension schemes it manages, funds for international clients and a growing portfolio of private assets. Its private-market assets grew from £57 billion to £75 billion last year, which helped the overall fee margin on assets under management rise from 8.8 basis points to 9.1.

The group's workplace defined-contribution pension platform will be a key driver of growth going forward. According to the Pensions Policy Institute, the aggregate value of private-sector workplace assets could grow from around £1.2 trillion in 2025 to around £2.2 trillion in 2045, or £4.4 trillion in a best-case scenario. There will also be significant consolidation among the major players. By 2035, the market is projected to comprise only 15 to 20 large DC “mega-funds”, down from more than 60 providers today.

Legal & General's workplace DC assets under administration rose 21% to £114 billion in 2025. Net flows totalled just £6.2 billion. But management believes workplace saving is now the group's “core customer acquisition engine” and the group expects £40 billion to £50 billion in net flows by 2028. The group's retail arm includes annuities, lifetime mortgage and retail insurance products.

Other revenue streams also suggest the business is firing on all cylinders. In the institutional retirement arm, the group has flagged a contractual service margin (CSM) of £12.4 billion, up 2% year on year. This is the unearned income the group is forecasting it will generate from its book of annuities – equivalent to roughly 214p per share, net of tax.

Management announced a £1.2 billion share buyback alongside the company's 2025 results – the largest in the group's history – on top of a 2% dividend hike. Total cash returns this year will come in at £2.4 billion, with management saying it expects £5 billion of shareholder returns from 2025 to 2027, 35% of the company's market value.

Based on these projections, shares are trading at a total shareholder yield of 16.7% for 2026 and a historical price-to-earnings (p/e) ratio of 11.9, although this does not account for long-term profit-generation potential, as highlighted by the group's forecast CSM. Legal & General is continuing its transition to a cash-generative, asset-light business. Investors should take note.

Rupert Hargreaves owns shares in Legal & General

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The Fidelity Special Values investment trust employs a contrarian value-investment approach, focusing on unloved companies with the potential for positive change. We evaluate the downside protection of a company before considering its prospects over a period of between three and five years.

We seek opportunities across the breadth of UK stocks, although there is a structural bias towards mid- and small-cap companies, as this is an under-researched area where we find attractively valued stocks with good turnaround potential.

It can take time for a turnaround to materialise and investors to buy into the story. A diversified portfolio means we do not rely on the recovery of a specific holding. By building a portfolio of stocks in different stages of the recovery process, we hope to deliver outperformance across different market environments.

Three overlooked UK stocks

DCC (LSE: DCC), a UK stock which offers other companies energy, healthcare and technology services, is restructuring. It plans to focus mainly on energy, an area where it boasts a strong record of generating attractive returns on capital and growing through acquisitions. The firm fulfils our downside criteria, given that the shares are on a historically low valuation, while management is delivering substantial share buybacks, which are highly accretive to earnings power.

Market sentiment has been weak, largely owing to concerns around the structural decline of the group's fossil-fuel distribution business. However, we believe these fears are overdone and the substitution effect is likely to be slower than expected.

The highly consolidated nature of the industry enables established players to maintain strong margins and deliver attractive returns. Meanwhile, DCC continues to expand its renewable-energy activities, including solar installation and other energy-efficiency solutions. DCC's defensive characteristics – akin to those of utilities – and attractive valuation make it stand out as a compelling turnaround opportunity.

Best known for Sports Direct, Frasers Group (LSE: FRAS) also owns a broad portfolio of retail brands, such as Flannels, House of Fraser, Evans Cycle and USC. Its strength lies in its unique business model. Frasers Group leverages its scale and relationships with brands to acquire discounted stock in bulk from major labels (such as Nike and Adidas), supporting margins and profitability.

Unlike most retailers, it owns its retail sites rather than leasing them, providing it with a significant amount of backing from property assets. It also owns sizeable stakes in Hugo Boss, AO World, Asos and Mulberry, underpinning approximately 40% of its equity value and jointly implying that the core business trades on a very attractive low single-digit price/ earnings (p/e) ratio.

Standard Chartered (LSE: STAN) is an emerging market-focused bank that operates across Asia, Africa and the Middle East, providing retail, corporate and institutional services in some of the world's fastest-growing markets. Over the past decade, management has reduced the risk inherent in the business, streamlined operations and steadily advanced a turnaround strategy that is delivering tangible results.

The bank offers an opportunity to tap into strong emerging-market growth, which is a play on Asia's growing wealth. It is probably the fastest-growing regional wealth manager; this division generates about a third of the group's overall profits. Wealth managers are generally viewed as high-quality businesses, and tend to trade around 15 times earnings, whereas Standard Chartered trades like a bank on ten times earnings. Where the market's perception diverges from reality is where we see the opportunity.

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Sometimes it seems we are too hard on Rachel Reeves. Yes, she is a bad chancellor: anti-business with no coherent vision for getting the economy growing and no backbone when she is pushed by her party. On the other hand, it has been seven years since Britain had at least a semi-competent chancellor, and she has inherited a catastrophic mess that would be a gigantic challenge even for an outstanding one.

One might briefly feel that she deserves some support as an under-qualified person trying to do an impossible job at the head of a sclerotic Treasury that needs to be broken up and rebuilt. Then you look at her proposed changes for individual savings accounts (ISAs) and all sympathy goes right out the window.

A brief history of ISA rules

To see why these ISA rule changes are so misguided and why they show Reeves and her team to be truly clueless about investing, let’s go back to when ISAs were first launched back in 1999. The ISA rules then were much more restrictive.

You could pay up to £7,000 into a “Maxi Stocks & Shares ISA” each year, or up to £3,000 into a “Mini Stocks & Shares ISA”, up to £3,000 into a “Mini Cash ISA” and up to £1,000 into a little-used “Insurance ISA” that let you put money into with-profits funds from an insurance company (which in theory was supposed to be less volatile than investing directly in the stock market). You could transfer from a cash ISA to a stocks and shares ISA, but not the other way round. Interest on cash held in stocks and shares ISAs was taxed at 20%. Investments had to have a credible possibility of losing at least 5% of the capital. Bonds had to have at least five years remaining until maturity when they were purchased.

There were a few tweaks through the years before 2014 when then-chancellor George Osborne greatly improved the ISA rules: a higher annual limit of £15,000 could now be split between a cash ISA and a stock and shares ISA in whatever proportions you liked. Money could be freely transferred between both. Cash interest was no longer taxed in a stocks and shares ISA, and low-risk cash-like investments were allowed.

This was a huge step forward. Subsequent changes to ISA rules include flexibility, allowing you to take out money temporarily and put it back again without affecting your annual allowance. You can also now contribute to more than one ISA of each type each year. Today, the ISA is probably the best account of its kind in the world and has inspired similar products in other countries.

Set against this, new types of ISA added complexity. The Help to Buy ISA was a counterproductive attempt to solve the housing affordability crisis that is now a legacy zombie product. The Lifetime ISA's potential as a flexible retirement savings tool was weakened by overly tight age limits and by withdrawal penalties. The Innovative Finance ISA has been too niche for most investors. So further reforms were overdue.

What should happen is the merger of most types of ISAs to create a flexible general-purpose wrapper. All providers could choose what to offer in the wrapper – including cash, investments and innovative finance products – according to what kind of customers they wanted to serve. Lifetime ISAs would probably remain as a separate product with similar flexibility, but open to a wider age range, with fairer withdrawal rules and the ability to transfer in stranded Help to Buy ISAs.

Rachel Reeves's ISA rule changes would be a retrograde decision

Instead, Reeves and the Treasury came to believe that restricting the ability to hold cash would encourage more money to go into the UK stock market. So, unless there is a change of heart, ISAs will take a huge step backwards from April 2027.

Cash ISAs will have a lower annual contribution limit (£12,000 versus £20,000). You will be able to transfer from a cash ISA to a stocks and shares ISA, but not the other way. Cash-like investments such as money market funds will no longer be allowed in stocks and shares ISAs. Interest paid on cash held in stocks and shares ISAs will be taxed.

In other words, we are returning to many of the pre-2014 ISA rules. The degree of stupidity required to attempt this cannot be overstated. Whoever came up with this proposal does not appreciate what investors and savers need and has ignored all the clear benefits that previous reforms delivered.

MoneyWeek would be the first to agree that there is a problem with attitudes towards investing in Britain, but the current ISA rules have nothing to do with that. Quite the opposite: at present, you can put money into as many cash ISAs or stocks and shares ISAs as you like, transfer between them freely, and hold investments then move to cash in the same account if you are nervous about markets or you need to reduce risk. This flexibility is reassuring. Your money does not feel trapped.

Trying to coerce people to invest by restricting cash ISAs is not going to work. They will simply hold cash in taxable accounts instead rather than take risks they don’t want. Much more plausible reasons why people in the UK are unwilling to invest are i) regulators that have been far too keen to talk up the risks of mainstream investments while doing far too little to crack down on unregulated scams and ii) the ongoing national obsession with property.

Depressingly, Reeves’ other proposed ISA rule changes also include plans to end the Lifetime ISA and bring in a new Help to Buy ISA. Whether this will increasingly leave existing Lifetime ISAs as a zombie product, like the original Help to Buy ISA, remains to be seen. Regardless, it would clearly be another retrograde decision. And if the stock market remains moribund, it can only be a matter of time before the immensely idiotic idea of a “British ISA” limited to UK stocks – or, even worse, restricting international investments in all ISAs – also gets resurrected.

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The Merchants Trust aims to deliver an above-average level of income and income growth, together with long-term capital growth, by investing primarily in high-yielding UK large cap companies. It has paid a rising dividend for 43 consecutive years. We seek firms with strong fundamentals trading below their intrinsic value, ideally in sectors with robust long-term growth prospects. Recently, we have found value in medium-sized businesses, including the three highlighted below.

Three UK mid-cap stocks to consider

Tate & Lyle (LSE: TATE) is a manufacturer of speciality ingredients, not to be confused with the sugar brand. It works with food makers to reformulate products to reduce sugar, calories and fat, while adding fibre, protein and other ingredients. The firm should be capable of steady growth while earning high returns thanks to the technical skills and solutions it can provide to manufacturers. Tate & Lyle has been through a long period of transformation, selling its more commoditised US corn-processing business and making several acquisitions of speciality-ingredients companies, adding a broader range of product lines and new relationships with customers.

While this process has improved the quality of the business, it has held back earnings. Moreover, the recent trading environment has been difficult, especially in the key US market, where consumers have reduced their food purchases owing to higher inflation. This combination of events has led to earnings downgrades, and the shares have derated very significantly. In our view, Tate & Lyle is a stronger business than it was a few years ago, but is also trading at a far lower valuation, which we think spells opportunity.

Hikma Pharmaceuticals (LSE: HIK) is a manufacturer of generic, branded and speciality pharmaceutical products, operating across North America, the Middle East, North Africa and Europe. The business operates through three divisions: injectables, branded and generics (now called Hikma Rx). The company is vertically integrated, with manufacturing largely carried out in-house.

It benefits from several positive structural themes. Pressure on health budgets is encouraging greater use of generics, including injectables. Demand for healthcare is growing as populations age, novel treatments are being developed and, especially across the Middle East and Africa, populations are growing and becoming wealthier. Historically Hikma has reported strong growth in sales and profits. The company has typically traded at a high valuation, reflecting the strong competitive position and growth potential. However, several events brought the valuation down to a low level. The pharmaceutical sector has generally derated and Hikma also had some specific issues and management changes. The shares fell heavily, providing a chance to buy a strong stock at an attractive valuation last year.

Whitbread (LSE: WTB) owns the UK's largest hotel chain, Premier Inn, which is expanding into Germany. The business has a strong competitive advantage over peers owing to its scale, its brand and a large base of freehold assets. The investment case centres on its five-year growth plan: to repurpose underperforming restaurant space into additional rooms; grow the estate in the UK and Germany; drive efficiencies and recycle capital for investment and share buybacks. In our opinion, the strong competitive position and the medium-term growth prospects have not been reflected in the share price.

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There is good news and bad news about the prospects for Britain's economy. First, the good news. The UK’s problems are relatively easily solved. A lot of money is pointlessly being thrown down the drain by the government, such as paying Mauritius to get rid of the Chagos Islands, rejoining the Erasmus scheme (to curry favour with the EU and the pro-EU lobby in the UK) and on asylum hotels. There are taxes that could be cut that would both raise revenue and stimulate growth, such as the taxes on oil and gas production in the North Sea, bringing back VAT rebates for tourists and reintroducing non-domicile status. Many of the recent tax increases, such as on inheritance, capital gains and private education, will raise little if any revenue, but harm growth. They could swiftly be reversed.

Curbs on welfare benefits and public administration would save money and increase incentives to work, as would restricting immigration to those with taxable employment. There is no need to cut public services, such as health, education and law and order, if productivity is improved. The NHS has made a good start with a 2.5% increase in 2024-2025, amply supported by data and anecdotal evidence. There is much more to go for, reducing the need for extra money to improve services. Deregulation would deliver savings for both the private and public sectors.

The resulting improvement in growth would lower the budget deficit further and lead to lower gilt yields, reducing the cost of financing the UK’s debts. This would enable tax cuts and create a virtuous circle of economic growth, improving public finances and prosperity, as experienced by Sweden in recent decades.

How Britain can learn from the US

The results of such a course of action are starting to be seen in the US, despite the perhaps premature tax cuts of 2025. Harsh restrictions on immigration and tariffs on imports have not, as many expected, been detrimental to growth, which is expected to have been 2% in 2025 and to accelerate in 2026, driven by productivity growth of 3.5%. Unemployment is ticking up, but while the government is shedding workers, the private sector is picking them up – the inverse of the situation in the UK.

Despite better growth, both bond yields and inflation in the US are lower than in the UK. The budget deficit only fell 2% in the year to September 2025, but relative to gross domestic product (GDP), it fell from 6.3% to 5.9%. Since then, the deficit has fallen 27% year-on-year, so a fall to 4% of GDP is likely in 2025-2026. The debt-to-GDP ratio in 2026 would then still rise, but fall thereafter.

There have been distinct structural improvements in the UK since 2008. Before then, growth was increasingly driven by private-sector credit expansion. This meant overindebted companies, unstable banks, debt-financed consumer spending, property speculation, too much mortgage debt and low savings, all of which was unsustainable. Since then, the savings rate has doubled, the proportion of households with mortgages has halved (and 80% of those with mortgages are now on fixed rates) and private-sector finances are much stronger. Future growth in the UK is likely to be much better balanced than in the past.

Don’t expect a change of course under Labour

The bad news is that the economy is unlikely to improve while the current government is in office – in fact, things are likely to get worse, with a stagnating economy, a persistently high budget deficit, stubborn inflation and rising unemployment. An early election is very unlikely; governments facing certain defeat, as in 1997, 2010 and 2024, hang on until the last possible minute, which means mid-2029. It is even possible that the government could delay the election beyond five years by changing the law that governs the dissolution of Parliament.

Some might hope that a funding crisis in the gilts market will force the government to perform a drastic U-turn in economic policy, but the precedent from 1976 is not encouraging. Then, there was only an L-turn, followed by three years of precarious stabilisation with some modest improvements. There will be no Damascene conversion. Just as likely is that the government will use the next three years to make life as difficult as possible for its successor through regulation, obstructive laws and strengthening its grip on the civil service and public sector in general. The next government may need to wield a chainsaw rather than follow a more evolutionary path.

Javier Milei has proved in Argentina that no country is in such desperate economic straits that it cannot be turned around swiftly and relatively painlessly by the right measures, speedily implemented. Moreover, this can be a recipe for electoral success. The UK has not passed the point of no return, as Argentina seemed to have done long ago, but people, though not necessarily investors, will have to wait.

Since Milei’s election in October 2023, the price of Argentina’s 5% 2038 bond has trebled. Bond investors in the UK may despair of the current government, but they will not want to be caught out when the tide turns. This argues against a funding crisis; too many investors would see such a crisis as a buying opportunity. Similarly, those waiting to buy UK equities in such a crisis are likely to be disappointed.

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Our investment approach is based on two propositions. Firstly, if you invest in equities, it is useful to be of an optimistic disposition. I will assert our optimism for global equities in coming decades. You could argue that the outlook has never been better. Technological change has created wealth for companies and consumers, and the advent of AI is likely to accelerate that process. Technology-derived productivity gains tend to drive down inflation, and hence interest rates; we hope rapidly falling interest rates could be a positive surprise in 2026-2027.

Secondly, if you invest in UK equities, as we do, it is important to shake off the pessimism that has afflicted the UK market. There are many world-class UK corporations offering participation in the great money-making investment themes of the 21st century. If the UK companies that populate our portfolios grow as we expect them to, they could deliver years of globally competitive returns.

Three UK equities to consider

I am disappointed that my first pick has become such a polarising investment, because we have been long-term backers of the company. However, if our strategic outlook is correct, then owning shares in the world’s top spirits company, Diageo (LSE: DGE), could be highly rewarding. Amid all the debate about consumers’ changing as regards drinking, no one has ever disputed the proposition that consumers are “drinking less, but better”.

That trend has been a multi-decade driver of Diageo’s business, the purveyance of premium spirits, and we expect it to continue. Even more fundamentally, technological change brings with it the risk of technology obsolescence. In these conditions, where some tech-wealth could evaporate with disarming speed, investing part of a portfolio in brands or franchises where you can, with some confidence, predict continuing relevance for decades to come makes a lot of sense. We have no doubt Diageo’s best brands offer that durability.

RELX (LSE: REL) is an important global company, a trusted provider of data and analytics tools to key global industries. Its CEO told us recently that RELX’s biggest division, Risk, is now, in his opinion, worth more than 50% of the value of the company, compared with only 2% 20 years ago. But despite that past performance, the Risk division’s current growth rate and its prospects appear better than ever. In his and our view, the advent of AI presents a chance for companies like RELX to create new insights for their customers from their proprietary and trusted Data.

Investors sometimes baulk at the apparently “high” valuation accorded to RELX. But surely, if we have learned anything from the long Nasdaq bull market, it is that digital companies, with must-have services and multi-year growth prospects, deserve high valuations. A mid-20s forward price-to-earnings ratio may be higher than the average UK company, but RELX is not an average company – far from it.

Clarkson (LSE: CKN) is an example of the opportunities in the unloved UK market. Here is a global leader – the world’s biggest shipbroker by a nautical mile – with a credible strategy to invest in technology and its data assets. The CEO describes his strategy as one of turning Clarkson into “the Bloomberg of global shipbroking”. If the company can execute that strategy, its reputation and valuation would improve dramatically.

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The leisure sector is but part of the gigantic services sector, which accounts for roughly 80% of UK GDP. The latter encompasses everything from professional services such as solicitors and accountants, to restaurants and coffee shops, banks and everything in between. As a result, the entire sector is connected to the consumer in one way or another. Whether it’s the waiter in the restaurant, or the highly-paid accountant that works for a US investment bank who buys a £15 lunch every day, the services sector, the consumer and leisure spending all go hand in hand. To put a number on it, consumer spending accounts for about 60% of UK national output, with the bulk of this generally described as non-discretionary spending on items such as food and drink.

Around 10% of the UK’s workforce is employed in what you could call the “discretionary” leisure sector, which encompasses businesses such as pubs and restaurants, hotels, travel-related firms, gyms and other similar businesses. A large segment is the travel sector, which, according to government figures, is worth around £70 billion a year, split roughly in half between domestic travellers and international visitors.

Challenging years for the UK leisure sector

The past year and a half has been a tough time for the UK leisure sector. It is highly dependent on the health of the consumer, both financially and in terms of confidence. Most data and surveys show they are becoming more cautious with their money, so they’re prioritising non-discretionary spending. Consumer spending tends to rise when consumers perceive their discretionary income to be increasing. When consumers perceive that to be declining, they stop spending, and that’s bad news for the leisure sector.

The latest data from Barclays on consumer card spending shows that it fell 1.1% year on year in November – the largest fall since February 2021. A survey from the British Retail Consortium trade body showed spending at big retailers rose by 1.4% in annual terms in November, the slowest growth since May. Consumer spending on leisure was relatively stable in the run-up to the pandemic, before dropping off a cliff in the first quarter of 2020, according to Deloitte. Sentiment and spending bounced back in 2021, but since May 2020, consumers have remained cautious due to rising prices, stagnant wages and political uncertainty. Analysts expect this trend to continue. According to the Office for Budget Responsibility and the Institute for Fiscal Studies, consumer discretionary income is expected to rise by just £100 a year, or thereabouts, until the end of the decade.

As spending has stagnated, costs have continued to rise. Energy, tax and wage costs have all risen substantially over the past three years, and it doesn’t look as if that is going to come to an end any time soon. In the Autumn Budget, the chancellor announced the national living wage would rise by 4.1% in April to £12.70 per hour, while the hourly national minimum wage would rise by 8.5% to £10.85. This followed a near 10% increase in the national living wage for workers over the age of 21 in 2024, which, when combined with the increase in employers’ national insurance, sent the cost of labour skyrocketing in the labour-intensive service sector.

Changes to business rates announced in the Autumn Budget are also going to increase the tax burden on businesses next year. The government claims it is keeping the increases down for the hospitality sector by phasing in the changes over three years, but the UK Hospitality trade body estimates that an average pub will pay £12,900 more over the next three years, while an average hotel will pay £205,200 more. Days after the Budget, Whitbread, the owner of the Premier Inn chain, said the changes would push costs higher across the business by 7% to 8%, giving investors some idea of what’s in store for the sector next year.

With these headwinds buffeting the sector, it’s no surprise that equities in the sector have fallen by an average of 1.6% year to date compared with a 7.6% return for the FTSE All-Share index. However, despite the doom and gloom, on an underlying basis, companies seem to be managing. Trading has held up and margins have improved thanks to operational efficiencies and the implementation of new technologies. As a result, the sector is cheaper than it was at the beginning of the year, trading at an enterprise value to Ebitda ratio of 6.4 times, compared with 7.4 times at the start of the year, and a p/e ratio of 11.8 times compared with 13.5 times, according to Panmure Liberum. There’s also growing evidence that consumers are in a far better position to spend as we head into the new year.

Consumers seem to be spending regardless

The average UK consumer, while not spending as much as the leisure sector would like, has a strong balance sheet. The percentage of disposable income that’s not spent on consumption (ie, is saved) rose to 10.7% in the second quarter, above the three-year pre-pandemic average of 5.6%, according to the Office for National Statistics. So consumers have money to spend if they want to spend it. There’s also been a shift in how consumers want to spend their money over the past three years, as the world has bounced back from Covid.

Consumers want to spend money on experiences, and are more than happy to pay for a one-off, unique experience that they can’t replicate. They also appear to be more willing to spend on big-ticket events and experiences. According to the YouGov GB Dining Out Report in October, 38% are eating out less than they did a year ago. Even for higher-income diners, that number is 29%. But a recent report by Bloomberg cited examples such as Hawksmoor and Gordon Ramsay restaurants, as well as high-end Michelin-star restaurants, that are recording bookings far in excess of last year’s figures, in some cases by as much as 30%.

And reading through the recent trading statements of companies in the sector, it’s clear consumers are spending more when they do put their hands in their pockets. Mitchells & Butlers (LSE: MAB), JD Wetherspoon (LSE: JDW), Fuller’s (LSE: FSTA) and Young’s (LSE: YNGA) have reported like-for-like sales growth of 3.8%, 3.7%, 4.6%, and 4.2% respectively in the run-up to Christmas – all ahead of the market. Young’s and Fuller’s are particularly notable, as they are more of a premium offering than the rest of the market.

Then there’s the data from travel company On the Beach (LSE: OTB). Alongside its results for the year to the end of September 2025, it said it expected a record summer in 2026, with 8% year-on-year growth, following 11% growth in 2025. Winter 2025 forward bookings were up 15%, it said, with four- and five-star holidays now accounting for 80% of the total. EasyJet (LSE: EZJ) has reported that 80% of its bookings are sold for 2026, with prices up by double-digits. It expects a 15% rise in customer numbers in 2026.

Everyman Media Group (LSE: EMAN), the operator of luxury cinemas, has said that while the UK box office has been “weaker than expected” in the fourth quarter, it has seen increased spending per head among customers visiting its venues. For the 26 weeks ended 3 July 2025, ticket prices and food and drink spending per head rose around 6% year on year.

Next (LSE: NXT), often considered the bellwether of the UK retail sector, has smashed its own expectations for growth this year. Over the 13 weeks to 25 October, full-price sales were up 10.5%, ahead of guidance of 4.5%. International growth helped, but full-price sales in UK stores rose by 4.3% and online sales by 8.7%. There’s even data showing that consumers are willing to pay more for everyday essentials. According to Which magazine, Ocado (LSE: OCDO), one of the most expensive supermarkets, ended its half-year to the beginning of June as the UK’s fastest-growing grocer over the previous 12 consecutive months. Revenue rose 16.3%, ahead of the market, as order volume per week jumped 14.7% and the average value of a basket of goods grew by 0.7% to £124.19.

Investors cannot ignore the cold, hard sales figures on the ground. All of these companies are recording robust growth that runs counter to the overarching narrative presented by surveys and the media. This suggests that some of the doom and gloom on the UK leisure sector is sentiment- and confidence-driven rather than an accurate reflection of spending patterns. Now could be the time for investors to leap in.

Leisure stocks are going cheap

The good news for investors is that some of the most attractive leisure stocks are currently trading at deeply discounted multiples, most likely a reflection of the poor sentiment towards the sector and consumer spending. This means there’s already a strong margin of safety baked into the names, limiting the downside if the environment is worse than trading updates suggest.

Marston’s (LSE: MARS) is one company that stands out in particular. Trading on a forward p/e multiple of seven for 2025, falling to 6.4 for 2026, you would think the company is struggling, both in terms of growth and financial sustainability. However, it recorded a 71.3% increase in profit before tax in its latest preliminary results. Sales increased 1.6% on a like-for-like basis, and its Ebitda margin expanded 140 basis points. Over the past two years, the company has seen a substantial decrease in net debt and interest costs as a result, with borrowing now down at 4.6 times Ebitda compared with management’s target of four. Free cash flow is in the region of £50 million, putting shareholder returns firmly on the radar for the first time in recent memory. The pubs and bars group is expected to report its Christmas trading in January 2026, but it has already said that Christmas bookings were up 11% on last year’s levels at the end of November. This is one stock that could see a substantial re-rating if the market comes to appreciate its turnaround story, valuation and growth potential.

Profiting from salad

Self-help initiatives always help unlock value for shareholders and catalyse a re-rating of undervalued equities. SSP Group (LSE: SSPG) sits on the edge of the UK leisure sector with a large international business, but is worth considering, with multiple levers to unlock value. The group, which owns brands such as Upper Crust and franchises including M&S and Burger King, runs concessions mainly at travel hubs worldwide – it’s the world’s second-largest operator in the space. SSP’s latest trading update recorded revenue growth of 6%, with especially strong performance in North America and weakness in continental Europe. Management has commissioned several strategic reviews of the portfolio recently, including a review of its Continental European Rail, a perennial underperformer. The group also holds a 50.1% stake in an Indian joint venture, Travel Food Services.

The latter listed in India last year and is trading at a higher valuation than its parent company K Hospitality. With Indian listing rules requiring a 25% free float in three years from listing (it listed with a 13.8% free float), SSP could sell some of its stake over the coming years, unlocking cash for investors. The sale of the firm’s underperforming businesses, as well as unlocking cash from Travel Food, are both potential catalysts for the stock, currently trading at a forward p/e of just 12.4. That’s also relatively cheap for a company that generates a pre-tax return on capital employed – a measure of profit for every £1 invested in the business – of 18.7%.

At the smaller end of the spectrum, Tortilla Mexican Grill (LSE: MEX) is worth a look. The company has a market capitalisation of just £16 million, so it’s probably not suitable for every investor, but it’s the fastest-growing business in the UK casual dining and leisure sector. The company recorded like-for-like sales growth of 7% in its latest trading update, more than double the market average, and it’s moving rapidly towards sustainable profitability as its store roll-out continues. The company, which creates “freshly made, award-winning California-style Mexican burritos and tacos”, has been leaning into the demand from UK consumers for healthy fast food. It launched a new menu, including items such as salad and protein pots, over the summer, and demand has been brisk, with salad volumes up 133% and protein-pot sales hitting £100,000 in the first eight weeks. Other new menu items are planned, as well as expansion into new markets. It’s rolling out new kiosks and has launched a franchising initiative with SSP.

However, it is struggling to digest its French business, Fresh Burritos, acquired in July 2024 for €3.9 million. An overhaul of the acquired brands is running behind schedule, and costs are growing, but it has given Tortilla a platform for growth within Europe. As these costs tail off, Panmure Liberum expects the business to earn its first profit of £1.6 million next year, rising to £4 million in 2027 as store openings continue. That would put the shares on a forward p/e of just five, dirt cheap for a company earning a return on capital employed (Roce) of 24% on its established UK arm.

On the Beach (LSE: OTB) is another operator with plenty of levers to pull to drive growth. As noted, holiday bookings are tracking much higher year-on-year, with consumers increasingly prepared to spend more. The company is also launching into new markets such as the Republic of Ireland, together with city breaks and cruises, to help complement its core beach-holiday arm (92% of business currently). The new city-breaks arm contributed 2% of the overall group’s 11% increase in total transaction value in fiscal 2025, highlighting the demand in this market. On the Beach’s cruise business is too new to judge at this stage, but this is a tried-and-tested market where the firm should be able to leverage its existing brand recognition to win further wallet share with existing customers. Analysts at Berenberg expect the company’s sales to rise 14% in 2026 and then 16% in 2027, driven by these initiatives and increasing customer spending. At the same time, they’ve pencilled in Ebit margin expansion from 24.7% in 2025 to 27.7%. Put all of the above together and the bank has pencilled in a p/e of 10.1 for fiscal 2026 and 8.1 for fiscal 2027.

Leveraging AI

Hostelworld Group (LSE: HSW) is a tech company masquerading as a leisure stock and is the world’s leading hostel-focused online booking platform. After building a solid growth platform over the past five years, the company is now midway through a plan to boost its exposure to customers earlier in the planning phase of their trips, leaning into the growing demand for experiences when travelling.

To that end, it recently acquired OccasionGenius, a US-based business-to-business event discovery platform. The platform leverages AI and technology, augmented with a human oversight layer, to aggregate resources, including national ticketing sites such as Eventbrite, Ticketmaster and thousands of “micro” sources, including local calendar sites and social media, to create marketing-ready content for its customers (such as hotels, dating apps and airlines).

Hostelworld has laid out plans to double OccasionGenius’s exposure, although it’s not expected to contribute meaningfully to the group’s bottom line in the near term. Expansion, plus increased booking demand, is expected to send sales up from £95 million to £118 million by 2027 and Ebit from £15.3 million to £22.5 million. However, what’s really notable is the group’s cash generation. The group is expected to move from a net debt to a net cash position of £21.4 million by 2027, compared with its current market value of £155 million. As such, on a net cash basis, the stock is trading at a sub-ten forward p/e ratio.

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We’re now halfway through the decade that began with Covid, which was succeeded by a surge in the cost of living. Geopolitical turmoil has also buffeted markets in recent years. 2025, however, was a good one for equities. Let’s see how the companies I picked early this year have fared over the previous 12 months.

Four of the six proved profitable, and the portfolio delivered an average return of 35%, comfortably ahead of the FTSE All World index’s 19.5%. This means that my picks have delivered an 89.65% return since 2021, or a yearly average of 17.93%.

This compares very favourably with most fund managers’ performances, as they usually fail to beat their benchmarks (despite their high fees for trying to do so). I also comfortably beat the market as the FTSE All-World achieved 55.9% in the same period. This means I am outperforming the market by 60%.

Luxury retailer Burberry has had a turbulent year, hampered by the tariffs and a shaky backdrop for household spending on luxury goods. The stock, which I tipped at 962p, fell as low as 596p before rebounding to new multi-year highs. The turnaround is progressing well and the investment thesis is intact – I believe there is more to come.

PensionBee, a platform that consolidates people’s pensions into a single, easily manageable online account and helps people manage them, has made great strides, expanding its customer base, which provides recurring revenue.

The company’s cash position more than doubled year on year in the third quarter to £33.3 million, from £14.6 million last year. The group is targeting one million invested customers by 2034 and with 297,000 already in the bag I believe the bull case is even stronger with a slight decline in price.

Gulf Marine Services is a provider of self-propelled, self-elevating support vessels (SESVs) for the offshore-energy sector. The stock has been very volatile and is finishing the year almost unchanged, despite being up 43% at one stage.

This is despite profit upgrades and a successful refinancing of the loan facility, resulting in a lower net-interest margin. In view of this progress and the price staying steady, I think the stock is a more attractive buy now than it was a year ago. At some stage, with continued deleveraging, the company’s improvement should be recognised by the market.

Filtronic is a British company specialising in the design, development, and manufacture of advanced radiofrequency (RF) communication components and sub-systems. Elon Musk’s SpaceX is a key customer.

Filtronic has been a major star in 2025. As I wrote last December, there was plenty of upside despite the high valuation as long as the business kept performing well. It has, with more profit upgrades emerging, and more follow-on orders from SpaceX. Again, there could be continued upside. However, I believe the balance between risk and reward has now changed as the price has caught up with the story.

Cybersecurity outfit Intercede has been the sole disappointment this year. I feel this is because there have been no big one-off contracts, as there were in previous years. This is a solid and resilient business, and I believe there is more upside here as the story continues to unfold.

Audioboom, a top global podcast platform, has been another top performer and a big contributor to my overall result this year, along with Filtronic. I was surprised to see that the company is considering putting itself up for sale so soon after raising money for the acquisition of Adelicious, another podcast network. While Audioboom has been a big winner already, I do feel there could be more to come.

This year’s selection are all cash-generative companies and established businesses. I have been burnt in the past by picking stocks without positive cash flow, and as there are no stop-losses allowed when choosing shares for a year, I’ve decided they are too risky to include. Remember, as always, my picks are never tips. They are ideas only. I do my best to highlight both positives and negatives, but you should do your own research.

Four stock ideas for 2026

1. Virgin Wines (Aim: VINO)

Virgin Wines is an online wine retailer. It floated in March 2021, and was buffeted by the cost-of-living crisis and changes to Apple’s iOS 14.5 operating system, which hampered online advertising. However, the group appears to have steadied the ship. Expenditure on acquiring customers has fallen and the business has remained profitable throughout.

At a market value of £27.1 million, the business boasts net cash of £9.3 million – after £2 million of shares were repurchased during the period. The cash it reports is split between the value of customers’ deposits and the actual cash on the company’s balance sheet, and not given as a single figure, as is the case at another wine retailer.

This year Virgin Wines managed to acquire 28% more customers by spending just 6% more. A new mobile app to be released in early 2026 will help customers engage with the business more efficiently. Commercial relationships with Ocado and Moonpig help explain why Virgin Wines recently announced that its pre-tax profit numbers are running ahead of expectations.

Earnings and net cash are expected to fall in the year to 30 June 2027, as the investment in acquiring customers eases, and there has been a further share buyback of up to 7.15% of the shares in issue approved.

If the company can now acquire quality customers who deliver a payback over the long run, then Virgin Wines could have a bright future. The market has hated this stock, but the early green shoots are starting to appear.

2. Peel Hunt (Aim: PEEL)

Peel Hunt is another Covid float, listing in September 2021 at 228p per share. It now looks as though the business is entering a new phase of growth. The current share price is 50% below the price at the initial public offering (IPO).

But a bet on Peel is a bet that the UK market will rebound, and Peel is in pole position with a growing list of corporate clients. It now provides investment-banking services for 57 FTSE-350 companies as well as many smaller growth companies. Offerings range from corporate broking and research to trading and flotations. Net assets currently stand at £100.7 million, against a market value of £119.1 million, and while there are no forecasts we can see the business generated a net profit of £8.3 million in the six months to 30 September 2025. Sales rose significantly in the same period, to £74.4 million from £53.8 million, but we also have to accept that this is a volatile figure as it is geared towards financial markets. But if you believe we are in for a new cycle of growth, Peel Hunt is lean and ready to capitalise.

3. THG (LSE: THG)

THG went public at 500p in September 2020. THG is an online retailer with a variety of brands. Its value has collapsed more than 90% since it listed. I have been a vocal bear on THG for some time, but when the facts appear to have changed I reserve the right to change my mind. Successful investors in equities always update prior assumptions when new information is released. The THG of today, in my opinion, is very different from the THG of a few years ago. The business had its strongest quarter of organic sales growth since 2021, with both THG Beauty and THG Nutrition’s growth accelerating.

THG’s Myprotein is one of the top nutrition, diet, and fitness brands in the UK. The brand is now expanding through collaborations with Mars and moving into gyms and supermarkets. I think the move offline solidifies Myprotein’s brand and presence, in addition to securing new growth and new customers. THG also sold Claremont Ingredients for £103 million, having bought it in late 2020 for £52 million, which proves it can spot and grow value. I believe Myprotein has the potential to keep growing and maintain dominance in its sector, which bodes well for THG without factoring in the growth of its beauty offering.

The overall business carries £321.4 million of net debt as of June 2025. However, the sale of Claremont will reduce this figure, and with the Beauty and Nutrition divisions both growing we could soon see a rebound in THG’s shares.

Still, it is worth noting that THG is forecast to be loss-making in 2026 before making a profit of £6.24 million in 2027. I would highlight that a lot of things can happen in that time, but also that there have been two share placings in the last two years.

THG’s cash balance was £129.4 million in mid-2025, down from £287.7 million in the first half of 2024. But we can also see that £181.7 million was a repayment of bank borrowings, while £21.7 million in cash was generated from issuing more shares.

A figure of £40.5 million for net cash used in operating activities shows that the company is more than adequately financed to keep the lights on for the foreseeable future.

4. Sylvania Platinum (Aim: SLP)

Sylvania Platinum is not another Covid float – the only stock in this quartet not to be. It is a South African company producing platinum-group metals (PGMs) such as platinum, palladium, and rhodium. As a result of the commodity prices being volatile, Sylvania’s profits and share price are both also prone to wild fluctuations.

For example, net profit was $99.8 million in 2021 and $7 million in 2024. But platinum has hit highs not seen since 2013, while palladium has fallen from $3,000 in 2022 to $1,350 in 2025, via a low of $850 in 2024. The company’s balance sheet is strong, with net cash of $60.9 million and management has a proven record of returning cash to shareholders via dividends and share buybacks.

Panmure Gordon has pencilled in $52 million of profit before tax for the year to 30 June 2026, and if we’re now entering a new bullish phase for palladium and platinum, as the recent strong price action indicates, then Sylvania’s cash and profits could be growing further in the coming years.

Michael holds long equity positions in BOOM, VINO, PEEL, THG, and SLP. You can find more of Michael’s trading ideas at newsletter.buythebullmarket.com

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If you want proof that British manufacturing isn’t dead, take a trip to an unassuming stretch of Stoke-on-Trent. There, on the same site it has occupied since Victorian times, sits Goodwin (LSE: GDWN), a heavy engineering group that has become one of the most profitable specialist manufacturers in the country.

It may not be glamorous, but Goodwin produces the components that keep critical national infrastructure running, such as precision-cast nuclear-waste containers for Sellafield, high-integrity parts for naval propulsion systems and specialised valves for the liquefied natural gas (LNG) industry. These are the bits that no one can afford to get wrong; and its excellence in these areas is why Goodwin is so profitable. But following its tremendous run, can investors still afford the shares?

Goodwin is keeping it in the family

Goodwin was founded in 1883 by Ralph Goodwin and, unlike most of its peers, has remained firmly under family control ever since. The modern business is still chaired by a Goodwin, still run by Goodwins, and still majority-owned by the Goodwin family.

Normally that might raise questions about governance. In Goodwin’s case, it has been its greatest strength. Family ownership has allowed the group to invest patiently over decades, avoiding the usual temptation to juice short-term profits. Instead, it has focused on landing long-horizon contracts where quality and reliability matter more than price. This persistence explains why the business is so well respected in industry. Its decades of excellence give it the kind of reputation that is almost impossible for a newcomer to replicate.

One thing that sets the business apart is a bold strategy to embrace change rather than be hostage to it. Ten years ago, Goodwin looked tied to the oil and gas market. When oil prices collapsed, the company faced a choice: to shrink with the market or reinvent itself. It opted for reinvention. The group pushed aggressively into sectors with high barriers to entry, such as defence, nuclear power and other specialist markets where components require complex metallurgy and spotless quality records.

More striking is what comes next. Management, usually conservative to a fault, now expects pre-tax profits to double to more than £71 million this financial year. The firm has a record £365 million order book to back up that forecast, stretching over many years thanks to nuclear-decommissioning projects and the UK’s next generation of nuclear-powered submarines.

Goodwin’s financial discipline is unusual

Unlike many industrial companies, Goodwin is not a cyclical business that generates modest but unspectacular returns. It has become a high-margin supplier of mission-critical parts to programmes that governments and businesses cannot cancel.

Goodwin’s financial discipline is unusual. Instead of loading up on debt to fund new capacity, it uses what it calls a customer-funded investment model. In practice, this means major capital expenditure is tied directly to long-term customer contracts. The customer commits; Goodwin invests. It’s incredibly conservative and effective. Cash generation has surged. Net debt has collapsed and is heading for zero. The board has responded with a 111% increase to the ordinary dividend, plus a large special dividend for good measure.

In a market where many engineering groups rely on hefty borrowings or dilutive equity raisings to grow, Goodwin stands out. It’s expanding while also deleveraging. Most investors will be focused on that. Yet Goodwin has a second act that could be worth more than the whole group in time. That business is Duvelco, its advanced-materials subsidiary, built around a patented polyimide called Ducoya. This has chemical characteristics that make it ideal in industries such as aerospace, which supports exceptionally high margins as its customers place a premium on proven performance. Supplying these markets requires technical qualification and rigorous testing. This long, complex accreditation process creates exactly the sort of barrier to entry that Goodwin has historically excelled at building.

Goodwin has broken its rule by funding the new pressing facility entirely from its own cash. That’s unusual for a group that normally relies on customer-backed spending. Management clearly believes Ducoya could become a profit engine in its own right. Yet, for all the optimism, the forecasted doubling of profits to £71 million doesn’t include contribution from the subsidiary.

Goodwin is worth the premium

Goodwin’s promotion into the FTSE 250 has put it firmly on the radar of index trackers and mainstream funds. The shares have re-rated sharply and now trade at a clear premium to traditional industrial peers.

Is that a problem? Possibly. This is still a specialist engineering company with limited free float, large exposure to big government projects and a management team that communicates sparingly. Those factors can make the shares volatile. Yet few listed UK manufacturers can point to a multi-decade record of quality with a pipeline of government-backed projects. On top of that, it has a near debt-free balance sheet, rising margins and an exciting advanced-materials subsidiary. The premium multiple reflects this reality.

The shares aren’t cheap, but neither is what you’re buying. For patient investors willing both to tolerate limited liquidity and trust in the family’s long-term stewardship, Goodwin remains one of the few genuinely high-quality industrial compounders left on the London market. If you’re already on board, it’s a strong hold. If you’re not, it’s one to buy on any meaningful pullback.

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Tetragon Financial (LSE: TFGS) is one of the most exotic investment trusts on the London Stock Exchange, with a unique approach both to investing and corporate governance. Its total returns are virtually unmatched, which makes it interesting to review regardless of whether the latter will put one off. Since listing in April 2007, it has produced a total return on a net asset value (NAV) basis of 568%, compared to 276% for the MSCI All Country World index.

Tetragon was originally co-founded by hedge-fund managers Reade Griffith and Paddy Dear to invest in the then-booming collateralised debt obligation (CDO) market. In the aftermath of the global financial crisis, it reinvented its strategy and today invests across a wide range of asset classes. It is far more complex than most vehicles of this kind (which tend to be just a listed feeder fund into a main hedge fund) and so it is simplest to start with a breakdown of the portfolio.

At the end of September, Tetragon had net assets of $3.9 billion, plus about $600 million of debt, resulting in gross assets of just under $4.5 billion. The largest part of the portfolio ($2 billion or 44%) consisted of full- or part-ownership of specialist asset managers through a business called TFG Asset Management. A controlling stake in Equitix, an infrastructure investor, is the single biggest asset, at more than 25% of the entire portfolio.

Equitix was founded in 2007 and Tetragon invested in 2015, since when assets under management have grown tenfold. Tetragon recently sold a 16% stake at a large mark-up to its carrying value. In total, managers owned or co-owned by TFG Asset Management run $41.5 billion in capital. Equitix, BGO (real estate) and LCM (leveraged loans) account for the majority of this sum.

The rest of the portfolio is in a range of different investment strategies: $1.33 billion in private equity and venture capital, $570 million in hedge funds, $310 million in equities and credit, $120 million in real estate, $100 million in bank loans and $60 million in “legal assets” (investments related to litigation finance). Some of this (22% of the total portfolio) is direct investments and some (6%) is in external funds. However, the largest share (31%) is invested in funds run by the same managers that Tetragon owns.

So in essence, Tetragon’s core strategy is to find attractive asset classes, identify managers who deliver strong returns in them, and then invest in the growth of these managers as well investing directly in their strategies.

Tetragon Financial's governance shortfall

If that takes some time to get your head around, so does the governance. Tetragon has a primary listing in Amsterdam and a secondary listing in London, with both dollar-priced and sterling-priced shares. These are non-voting shares and the only voting shares are held by a company controlled by Griffith and Dear, so the founders hold all the cards.

Even though Tetragon owns investment managers, it has an external manager called Tetragon Financial Management, which is also controlled by Griffith and Dear. The fee structure under this arrangement leaves much to be desired: an annual management fee of 1.5% plus a quarterly performance fee of 25% over its hurdle rate (three-month US interest rates plus 2.75%) with no high-water marks.

These shortcomings are probably why Tetragon trades at a persistent discount to NAV (currently 55%). The only mitigating factor is that insider ownership still creates alignment between Tetragon and its shareholders. As of June, more than 38% of the shares were owned by Griffith, Dear and employees. That provides some incentive to achieve the best results for all shareholders.

The shares have returned 385% since inception, which is less than the NAV return (because the discount has widened since it floated), but still very strong. There’s a modest annual dividend of $0.44 per share (yielding 2.3%), but $570m of share buybacks over the past 10 years has reduced the number of shares outstanding by 13%.

This is not an trust that will appeal to most investors. Anybody tempted to buy will need consider it at far greater length than there is space to do here. Still, it is hard to argue with its historic performance.

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“There is a great deal of ruin in a nation,” wrote the economist Adam Smith, meaning that a successful country can withstand a lot of mistakes and incompetence before it is destroyed. He did not, of course, intend it as an open invitation to politicians to try their worst. That point appears to have been lost on every British government of the past decade.

The latest Budget is a deeply dispiriting one: anti-growth, anti-optimism and anti-investing, as Andrew, Kalpana and I discuss on the new MoneyWeek Talks podcast. It goes without saying that there was nothing to alleviate growing fears of long-term economic decline. What felt like a new low was the undermining, for no obvious reason, of things that still work.

The reversal of much of the ISA flexibility brought in just a decade ago. The slashing of tax relief on venture capital trusts at a time when fundraising has been weak. The cap on salary sacrifice for pension contributions. These were accompanied by pointless ideas such as the three-year break from stamp duty for new initial public offerings (IPO), which will do nothing to revive the increasingly moribund London Stock Exchange. All suggest a chancellor and a Treasury who have no clue what they are trying to achieve.

Hidden opportunities in Britain's stock market

Still, the level of pessimism about Britain and the lethargy of the stock market probably increases the extent to which opportunities can keep hiding in plain sight. Take investment trusts. There are several sectors that trade at yawning discounts to net asset value (NAV), including infrastructure, renewable energy, private equity, real estate and various niche strategies. In some cases, these discounts will be justified – reported NAVs will not be realistic and we see this when funds take huge write-downs as they wind down and try to sell assets. Yet in other cases, we see funds carrying out sales near their carrying value or better, which helps to validate NAVs. Overall, there is a substantial amount of mispricing, with not enough investors to do all the hard work.

This situation will not persist indefinitely. Where assets are worth more than their market price, they will be taken out by specialists. These are one-time gains, and the market will shrink as they are snapped up, which is not good for the long-term health of London. But as investors we can only take what chances we are given.

More attention from activists will help speed this process along, so it’s worth taking a look at MIGO Opportunities Trust (LSE: MIGO), one of a handful of funds that invest in other closed-ended funds. Under Charlotte Cuthbertson and Tom Treanor of Asset Value Investors, the trust’s strategy is shifting towards a more concentrated portfolio and greater engagement to unlock value. At £75 million in assets, it can take meaningful positions in small targets and will have limited overlap with AVI Global Trust (LSE: AGT), its £1.3 billion stablemate. This makes it an obvious way to capitalise on some of the market’s blind spots.

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JPMorgan Chase could have chosen Paris, Frankfurt or even Amsterdam. Yet the giant US bank has decided to build a new £3 billion European headquarters in London’s Canary Wharf instead. That is a huge vote of confidence in London and the City at a time when faith in the British economy has reached its lowest point in recent memory. It is also a sign that the Brexit wars have finally been won – and the City will remain the key financial hub for Europe.

Given the UK’s recent dismal track record of delaying any kind of new project, and allowing costs to escalate with dozens of unnecessary regulations, it may be a few years before the diggers and cranes actually get to work. Even so, with 12,000 square feet of space, it will eventually be a huge addition to the Wharf’s existing floor space and it will be home to 12,000 staff, making it the bank’s major hub for Europe and the Middle East. Canary Wharf has been struggling since the pandemic as firms adapted to working from home. A major new tower will boost the Wharf after a difficult few years.

In the aftermath of the UK’s departure from the EU, Paris and Frankfurt, with the help of officials in Brussels, made a huge effort to replace London as the key financial centre for the continent. In Paris, president Emmanuel Macron introduced special tax deals for bankers fleeing across the Channel, and the French regulators even translated all their forms into English to make the paperwork easier.

Meanwhile, Frankfurt created promotional videos selling the lifestyle to be enjoyed there to London-based finance workers. Huge amounts of money and energy were poured into the campaign and there was lots of speculation that one or the other would become Europe’s main financial centre, with London reduced to little more than a regional outpost.

We don’t hear very much about that any more, and for good reason. In reality, both cities have become less appealing over the last few years. The bankers who moved to Paris have found that promises of lower taxes have turned out to be illusory. With a huge deficit to finance, the French government is desperate to raise money any way it can, and “the rich” are an easy target. It has already introduced extra taxes on anyone earning more than €250,000, hardly a fortune at JPMorgan, and it is now threatening a wealth tax as well as a plan to force the rich to “invest” in government bonds at zero interest.

The country is so politically unstable, it is hard to know what might happen next. But one point is clear. It would be a very risky place to locate a major banking headquarters right now.

The Brexit wars have been won

Germany is not much better. Its industrial slump has made it the worst performing of all the major European economies. Government spending and borrowing is soaring as it starts to rebuild its military in the face of Russian aggression, and its political system is trapped in permanent coalitions that makes significant reforms impossible, while the far-right AFD rises in the polls. Germany is not in as much of a mess as France, but it is hard to see Frankfurt becoming a major financial centre any time soon, even if it is home to the European Central Bank.

Both cities have blown the opportunity. In the end, both were too bogged down in domestic politics and their own economic decline, while the EU carried on imposing more and more regulations on finance, ignoring the opportunity to deregulate. It has been a long time since we read a report about bankers relocating to Paris or Frankfurt, and we certainly won’t be hearing about many over the next few years.

The UK is hardly in great shape. London has plenty of challenges if it is to survive as a major global financial centre. It needs to find a way of reviving the IPO market to reverse the decline in the equity market, to stem the exodus of entrepreneurs, to persuade the government to stop raising taxes all the time and to embrace new technologies to stay ahead of its rivals. And yet, it does have one thing going for it. Despite leaving the EU, it has won the battle to remain Europe’s main finance hub. JPMorgan’s new tower will prove it.

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The stock market setback in 2022 was especially painful for investors in investment companies because many trusts also saw a sharp widening in their discount to net asset value (NAV). Starting from an average in the low single digits, discounts had reached mid double-digits by the end of the year, then grew further to nearly 19% by late 2023. Markets have recovered strongly since then and continue to rise. Yet discounts have only narrowed to 14% on average, and remain much wider in other sub-sectors.

This has had serious consequences for the sector. The wealth managers and private investors who sold during the fall in 2022 or in the subsequent recovery have barely returned. Share issuance has dried up almost completely, both for existing trusts and new ones. Trusts have been wound up or merged. Activist investors have moved in, claiming – with justification, in some cases – that underlying returns had been poor.

Some trusts had lost their way. Others were in an out-of-favour sector, such as infrastructure, private equity or healthcare. Still more have struggled to keep up with markets – when small- and mid-cap stocks outperform, they are often a tailwind for many generalist funds that have higher exposure to smaller stocks than the index does, but the recent dominance of a narrow range of US mega-caps has reversed this effect. Finally, UK investors have continued to sell UK shares – both investment companies and trading companies – even as the market has risen.

The optimism of a few years earlier has given way to talk of an “existential crisis”. Investors are put off by the compounding effect of widening discounts, poor liquidity and weak performance. Valuations of unquoted assets and property are treated with deep suspicion. Trust directors are accused of being asleep at the wheel, with aggressive buybacks failing to reduce discounts. Yet amid the deep pessimism, it’s worth noting that old hands have heard it all before.

A crisis period for investment trusts

Fifty years ago, the sector was in deep crisis. January 1975 marked the depths of the two-year bear market that saw UK shares fall 70% in nominal terms and 80% in real terms. Trust discounts peaked at more than 40%. They narrowed as the market rebounded, but remained at around 25% for the next 10 years. After Foreign & Colonial (now F&C), the first investment trust, launched in 1868, private investors remained the backbone of the sector until the mid 1960s. There were regular new launches and the sector generally traded at a premium to NAV. However, they then started to abandon the market as a result of inflation, bear markets, poor relative performance as discounts rose, and a growing preference for life-insurance products with favourable tax treatment and unit trusts that traded at NAV.

Investment trusts had huge disadvantages for the private investor. There were no individual savings accounts (ISAs) or self-invested personal pensions (SIPPs) to protect them from income and capital gains tax, at higher rates than now. Stamp duty was 2%. Private investors had to pay commission to a stockbroker of 1.65%, both for buying and selling, unless they were dealing in large sizes. The bid-offer spread was only available when the broker walked onto the floor of the stock exchange and asked a “jobber” (market maker) for a bid and offer.

A trust could borrow to invest, but interest rates were prohibitively high. Share buybacks were illegal under section 54 of the 1948 Companies Act, as was paying dividends from capital. Accumulated revenue reserves could be distributed, but otherwise dividends were limited to earnings, with all costs, including interest and all management fees, expensed. Boards were self-selecting oligarchies, often in cahoots with the managers and serving indefinite terms. Communication with investors was limited to the annual and interim reports and accounts. There were no fact sheets, and brokers’ research was limited to professional investors. Opportunities to meet, see or hear the managers were almost non-existent.

Thanks to exchange controls, investment was heavily weighted to Britain: UK equity exposure was nearly 50% in 1975 and rose to above 60% in 1980 as markets, especially in the UK, recovered. Exchange controls were abolished in 1979 leading trusts to invest more overseas, but this was a time when the UK was outperforming overseas markets, so this diversification was not adding value.

The turning point for investment trusts

Yet by 1981, there were signs of recovery. “The tide for investment trusts has turned and the climate has changed dramatically for the better,” wrote Robin Angus of Wood Mackenzie. “Most world markets have made considerable progress; greater specialisation within the sector has been on offer and capital gains tax reform has increased the appeal of trusts to professional funds. Average discounts remain nearly 30% but prices have yet to reflect the success of international diversification.”

During the previous year there had been six takeovers, eight conversions into unit trusts and six other trust removals. Against that, there were 10 new issues, five rights issues and 13 changes of investment policy. The move to specialisation, mostly via new issues, resulted in four oil and energy trusts, three investing in Japan, three in technology and biotechnology and three in UK smaller companies.

As private investment declined, pension funds and insurance companies bought into the sector and became the dominant holders, seeing it as a cheap way into the equity market. Yet a new threat had appeared.

Corporate financiers had invented the trick of getting their clients to bid for investment trusts at a discount as a disguised rights issue. This led to Robert Maxwell taking over the Bishopsgate Investment Trust and to the British Coal Pension Fund launching a successful hostile bid for the £1.1 billion Globe Investment Trust, the largest in the sector. Such bids and liquidations were “killing the goose which lays the golden egg”, said Angus. “A once-and-for-all gain may be desirable and substantial but it can never be repeated.”

As to discounts, there would be “a fairer ground for criticism if discounts were something new”, he wrote. “They provide endless opportunities for the shrewd investor to make money by switching in and out. At best, one can gear up one’s gains if one has the good fortune to spot a winner at an early stage.” The problem was one of performance, not over-supply. “An unattractive trust will sell at a bigger discount no matter how drastically the number of shares is reduced overall, while an attractive trust will sell at a small discount or even a premium.”

A better future for investment trusts

Angus passed away in 2022, but were he still with us, he would surely see many similarities between then and now. He would recognise – but have little time for – the “death list mentality with regard to the future of the industry”. He would observe that strongly performing trusts were mostly trading at a small discount or at a premium, and point out that apparent poor performance had been exacerbated by trusts trading at NAV four years ago. He would surely note how much trust governance has improved, applaud share buybacks and approve of the current dividend flexibility. And he would probably regard the last few years as a period of creative destruction for the sector and note, again, how the tide had turned.

Investment trusts face a better future. Liquidations, mergers and buybacks will give way to net issuance as discounts decline and premiums become more common. Still, net issuance has a historic tendency to be focused in the wrong areas; split-capital trusts, insurance-underwriting trusts, hedge fund-like trusts and renewable-energy trusts. Investors will need to beware of such crazes, which usually end in tears.

“The lesson of the last few years for trusts is that you have to get on the front foot and tell your story,” says Ed Warner, chair of HarbourVest Global Private Equity. This is true. At the same time, the lesson for investors, as in 1981, is not to wait for a better investment opportunity. It may never come.

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The long run-up to the Budget gave rise to fevered and increasingly alarmist speculation about its contents. This descended into chaos as frantic lobbying by interested parties, dire warnings by expert observers, and threats of rebellion by the government’s backbenchers led to U-turn after U-turn. Now, at last, the Budget has been delivered, and the speculation is over. What does it mean for the UK stock market?

The answer is very little. The FTSE 100 is very likely to continue climbing, while mid and small caps, which have underperformed in recent years, should recover lost ground. There is very little correlation between the performance of a country’s economy and its domestic stock market, which is why the Australian stock market has more than doubled in the last 10 years while China’s Shanghai index is up 10%.

About 75% of the FTSE 100’s revenues and about 50% of the FTSE 250’s sales stem from outside the UK. Many FTSE 100 companies, such as BAT, Shell and Rio Tinto, are based in Britain but do very little – if any – business here. Others, like Mondi, Airtel Africa and Coca-Cola HBC (formerly Coca-Cola Hellenic Bottling Company) use a London listing as a mere flag of convenience. Companies like Vodafone, National Grid and Compass have evolved from domestic into international businesses; and primarily domestic companies, such as EasyJet, M&S and Next, are increasing their overseas exposure.

Twenty years ago, the blue-chip index was dominated by mega-cap companies that had grown big through mergers in the late 1990s but were then stagnating in terms of business, earnings and share price. Now, those companies, much diminished in relative terms, are working hard to grow, improve profitability and reward shareholders. Even Glaxo and Vodafone have seen notable turnarounds recently, while Diageo reacted quickly to disappointing trading that had halved its share price.

UK-based companies are not expecting the government to do them any favours with regard to the economy, profitability or taxation; their attitude to investing and doing business in the UK is based on pragmatism. AstraZeneca has therefore responded to a withdrawal of government support by switching its attention to the US.

Global investors spot a bargain in UK stocks

UK-listed companies are attracting increasing attention from overseas investors, who are gradually eclipsing domestic ones. In the last couple of years, the chart of the FTSE 100 has accelerated upwards, while there have been “early signs of an earnings reacceleration”, says Chris Watling of Longview Economics.

The prime problem for the UK market has been the lack of participation by domestic investors, but this is likely to change. There have been heavy net outflows from equity funds, especially from UK funds (in 50 of the last 51 months). UK investors have shunned equities, deterred by risk warnings, economic gloom and regulatory hostility, and unaware that cash loses value over time in real terms. Over two-thirds of individual savings accounts (ISAs) are just in cash.

Yet the UK savings rate is over 10%, double the historic average. Interest rates and hence deposit rates are likely to fall further, and equity markets have been rising for three years. Savers will wake up to the reality that they are missing out and, in 2026, should start to discount a change to a more business- and investment-friendly government. Finally, the attention drawn to the FTSE 100 breaking through 10,000 should galvanise investors.

Admittedly, the tenfold appreciation since launch at the start of 1984 is not that impressive in annual terms. Adding back an average dividend yield of 3%, the annualised return has been 8.5% or 5.6% in real terms. The return until 2000 was much better than subsequently, but at its millennium peak of nearly 7,000, the FTSE 100 was severely overvalued and set to fall in half. Taking this into account by estimating a trend level of 4,500 still shows a marked slowdown in annual returns from 10% in real terms before 2000 to only 3.3% subsequently.

Arguably, the change of trend coincided with the deceleration of economic growth in 2008, but it is likely that an unsustainable boom in financial services disguised a more gradual slowdown in the preceding years. In any case, the claim that Britain’s economic problems date back to the Brexit vote in 2016 are a myth, just as was the claim in the 1960s and early 1970s that Britain’s pedestrian economic performance was attributable to being outside the EEC.

Ultimately, sustained outperformance by the UK stock market will require a strong, lower-tax economy to encourage the creation of growth businesses, their access to domestic capital and their listing in London. The market needs to go up because demand for equities exceeds and pulls up supply, not because markets are shrinking (through takeovers and buybacks) faster than investors are taking their money out.

As economist Arthur Laffer points out, “every time we have raised taxes on the rich, three things have happened: the economy underperformed, the share of tax revenues from the rich fell and the poor got hammered. When we cut taxes, the reverse happened.”

Even the prime minister has said that “the UK cannot tax its way to growth”, though his chancellor and most of his party appear to disagree. “If you want to help the poor, create growth,” says Laffer, who quotes John F. Kennedy: “The best form of welfare is a good, well-paid job.”

Better economic news for the UK may be a change of government away, but the good news for investors, whether in the UK or via UK-listed funds, is here already.

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Speculating about what will be in this year’s Budget is fairly pointless, not least because the plans clearly change every few days. But the persistent chatter that the chancellor would like to coerce or persuade private investors to hold a minimum level of UK stocks in their individual savings accounts (ISAs) is worth a brief thought. To declare my bias, I think this idea is daft and not just because of the headache of deciding what’s British enough. International miner Anglo American after it moves its headquarters to Canada? An investment trust with half its assets in Asia? An exchange traded fund that tracks the S&P 500? The ISA rules are already full of nonsense – we don’t need any more.

The idea that ISA tax relief should be a quid pro quo for investing in British stocks misses the point. ISA and pension tax relief exists to get people to put aside money for their retirement and other needs. That money should be invested according to the balance of risk and reward for each investor. If that means no UK stocks, that is still the right outcome. If the government wants to save the UK market, it should work out why firms don’t want to list and investors don’t want to invest voluntarily, and fix that. Coercion is never going to be a better option than solving the underlying problems.

ISA investors are already heavily invested in the UK stock market

Yet it still raises a good question. What is a neutral level of investment in British stocks? Well, the UK is about 3.5% of the MSCI World index of developed markets. That’s a starting point. However, these indices have their own skews: they are affected by the high valuation of US markets (America is now 73% of the MSCI World) and by restrictions such as free float. For a different perspective, look at equal weight indices, where valuations and free float don’t matter: instead, they broadly reflect the number of stocks in each market and so the number of opportunities available for investment. The MSCI World Equal Weighted index has about 5.5% in the UK (the US is about 41%).

So one way of looking at this is that neutral exposure to the UK is somewhere around 5%. It would be less if we factor in emerging markets, but we get into some complications over access restrictions, so let’s keep this simple.

How much does a typical ISA investor hold? You’d think this would be easy to answer, but it’s not. While HM Revenue & Customs asks ISA managers to report how much is held in different investments, the categories it asks for are a baffling, outdated and overlapping hotchpotch that at no point simply says “UK shares”. However, ISA investors have 23% of their total holdings in UK equities and by inference about a third of their equity holdings in the UK, according to data compiled by the Investment Association and provided to Bloomberg. You can find other figures, but the story is consistent: ISA investors are already overweight the UK. Maybe that makes sense – the UK has held its own against the world ex USA in recent years. But we don’t need to be forced to hold more.

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The strategy employed by Temple Bar is known as value investing. This is the process of buying a company’s stock for less than its true worth, or intrinsic value. By buying at a discount, this strategy builds in a “margin of safety”: while in the short term an undervalued company’s share price might fall further, in the long run the built-in value should ultimately be recognised by other investors, prompting the share price to rise to reflect the stock’s intrinsic value. There is much empirical evidence to show that value strategies have outperformed stock markets over the longer term.

Of course, some companies are cheap for a good reason, but we believe investments in good-quality yet undervalued companies with strong cash flows and robust balance sheets offer the best potential for attractive long-term investment returns.

Three British stocks worth adding to your portfolio

Although Aberdeen Group (LSE: ABDN) has been known as an asset manager for many years, the company has in fact managed to diversify and now operates three different businesses: Investments asset management; Adviser, a business-to-business (B2B) division; and interactive investor (ii), a trading platform for consumers. Aberdeen’s B2B business is the UK’s second-largest platform offering advice, measured by assets under management; and ii is the UK’s second-largest direct-to-consumer investment platform.

The group appointed a new CEO in 2024 to help make the firm more profitable. We estimate that a restructured Investments business within Aberdeen could be worth an additional £1.5 billion, and therefore see a potential restructuring as a free call option embedded in today’s valuation. There are also financial assets worth £2.1 billion on the balance sheet. Combining our estimated intrinsic value of the three businesses with these financial assets, we deem the shares significantly undervalued.

Smith & Nephew (LSE: SN) is a medical-devices business. It has struggled for some time, losing market share in its key orthopaedics business and suffering from poor levels of productivity. There is now a 12-point plan in place to drive financial improvement. If successful, it could lead to higher sales growth, productivity improvements, expanding margins, and higher cash flow and shareholder returns. In the last 18 months, there have been clear signs that the turnaround is working, as the company has delivered annual sales growth of more than 5% and an expansion in margins. We believe that Smith & Nephew is a high-quality business with strong market positions in relatively stable but growing markets, and we expect meaningful growth in profits in the medium term.

Johnson Matthey (LSE: JMAT) is a speciality chemicals business. JMAT has historically delivered a stable level of sales and underlying operating profit. In recent years this consistency has been impeded by investments in hydrogen. Concerns around hydrogen, a decline in prices of platinum-group metals and the transition to electric vehicles have led to a derating in the stock. Management have since recognised the risk of pursuing growth in unproven technologies and have shifted their focus toward maximising cash flows and shareholders’ returns.

At the time of its results in May, JMAT announced the sale of its Catalyst Technologies division for £1.6 billion and an intention to return 90% of the proceeds to shareholders. This division accounts for just 25% of the company’s profits and yet the sale’s proceeds made up two-thirds of its market value at the time of the announcement. The shares responded favourably on this news. We believe that the shares remain significantly undervalued.

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It is not just the London Stock Exchange that has been suffering a relentless decline. It is happening right across Europe’s main bourses. There was a 15% decline in initial public offerings (IPOs) across the continent in the first half of this year compared with 2024, according to accountants EY. Measured by revenues raised, the decline was 50%. The bulk of the IPO market is now in the US, China, India and the emerging stock markets in the Gulf. Europe is falling behind. Just as in London, firms have been leaving the markets, or have been taken over, and very few new companies have been coming through to replace them.

German chancellor Friedrich Merz has a solution. “We need a kind of European stock exchange so that successful companies such as biotech firms from Germany do not have to go to the New York Stock Exchange,” he told the German parliament last week. “Our companies need a sufficiently broad and deep capital market so that they can finance themselves better and, above all, faster.” Instead of separate exchanges in Paris, Frankfurt, Milan and Madrid, a single unified bourse could list all of the continent’s major companies, offering a scale and depth to match New York.

A single, unified exchange would be a lot simpler for investors, especially from North America and Asia. It would have access to a lot more capital, which might mean valuations were higher. True, with Euronext, which links the Netherlands, France, Italy and Portugal, we already have that. But a pan-European exchange would go a lot further. The London Stock Exchange, which has already dropped out of the top 20 for global listings and has seen a relentless decline in the number of companies traded, would almost certainly join. It is in bad enough shape already, and if a new European exchange were formed, it would be even more irrelevant than it is already if it were not part of it.

Would a single European stock market fix anything?

The catch is that this is just the same old, tired formula of more integration that has dominated policy-making in all the major European countries for the last 30 years. It hardly begins to address the major issues facing every European stock market. Firstly, the whole of Europe has imposed far too many rules and regulations on listed companies. In the City, there are an endless series of governance codes to comply with, including diversity quotas for boards and restrictions on executives’ pay, but it is just as bad across the EU. Companies with more than 500 employees have to comply with rules on sustainability and supply chains that typically run to hundreds of pages. Each one might be well intentioned in itself, but taken together, they add to the cost and complexity of listing a company.

Secondly, crushing taxes and rules across the continent mean there are few new growing companies. The US has an estimated 700 tech unicorns, as start-up companies with a value of more than $1 billion are known, compared with fewer than 200 in the EU, despite the fact that it has a significantly larger population. Companies such as OpenAI and SpaceX have valuations that already run into the hundreds of billions, far larger than anything that is coming out of Europe. In short, Europe does not have nearly enough new companies, the ones that it does create don’t grow quickly enough, and even the handful that do emerge don’t find listing their shares very attractive.

It is hard to see how a single European stock market will do anything to fix any of that. It won’t mean that the listing requirements are less of a burden. In fact, given all the compromises that will be required to make it happen, and all the extra powers that are likely to be handed over to EU officials to regulate it, it will probably make them worse. And it won’t do anything to lighten the taxes or the regulatory overload that now makes it so much harder to start a business in Europe than it is in the US, the Gulf, or much of Asia. All it does is double down on the failed centralising strategy of the last 30 years. It would be far better to have national bourses competing to offer the most attractive forum for listing a company. Having a single stock market won’t make any difference.

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Private equity has grown rapidly in recent years. By 2024, there were more than $6 trillion in private equity assets, up from $2 trillion a decade ago, according to data firm Preqin. Venture capital added about $2 trillion more, up from $0.5 trillion in 2014.

While that sounds huge, it is still a fraction of the size of public markets. Total private equity and venture capital investments – including funds of funds – are roughly 12% of the size of public equity markets, according to private equity group HarbourVest, even though there are nearly 25 times more privately backed companies than public ones.

Returns have been solid. In the 25 years to the end of 2024, private equity funds returned about 9% a year, with volatility of around 10%, according to Deutsche Numis and Datastream. UK government bonds returned 4% a year over the period, with volatility of roughly 6%, while the FTSE All-Share returned 5% a year, with volatility of about 15%.

Still, past performance is not a reliable guide to the future, and there are reasons to think private equity’s long boom could be ending. Higher interest rates increase the cost of the debt that plays an integral role in financing leveraged buyouts.

Meanwhile, weak appetite for private equity-backed initial public offerings (IPOs) mean that managers are struggling to offload mature holdings they own onto public markets – of course, this indigestion is partly because many private-equity IPOs have subsequently performed poorly.

Unjustified discounts in private equity

However, investors shouldn’t write off the sector just yet. Listed private equity trusts in the UK offer exposure to industries and portfolios of companies not available on the London Stock Exchange. For example, HG Capital (LSE: HGT) owns a portfolio of tech businesses, a sector poorly represented in the UK market.

The majority of the sector is also trading at a deep discount to net asset value (NAV), despite evidence to suggest discounts are conservative, on average. Private equity trusts rely on in-house processes to put a value on their portfolios. The results are highly subjective, and so valuations are only proven when assets are sold. However, last year all the main trusts sold assets at a premium to their carrying values.

In the case of HarbourVest Global Private Equity (LSE: HVPE), the premium was roughly 30%, compared with the trust’s current discount to NAV of 33%. HG Capital’s average premium was around 15%, against a current discount of 8%. Pantheon International (LSE: PIN) achieved close to 25%, despite a discount of 33%. Over the five years, the average uplift on exits was about 30%. HarbourVest was an outlier, with an average of nearly 80%.

Playing the whole private equity sector

As an alternative to individual trusts, funds such as iShares Listed Private Equity (LSE: IPRV) and Pareturn Barwon Listed Private Equity Fund hold a diversified portfolio of trusts and listed managers.

“Although trusts and managers are fundamentally different, we think they’re highly complementary and allow an investor to gain exposure to ‘both sides of the equation’ – ie, the returns on the investments, and both the management and performance fees the manager earns on its investments,” says Bob Liu of Barwon. This also provides diversified exposure to managers who are increasingly focused on specific regions, sectors or market segments.

However you approach it, bulls argue the market is undervaluing private-equity assets, which will be bought up if discounts do not close. As if to prove this point, the Goldman Sachs-controlled, London-listed Petershill Partners (LSE: PHLL) – which provides growth capital to private equity and managers – announced two weeks ago that it is going private. The buy-out offer is a solid 35% premium to its pre-announcement price.

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Over the last couple of weeks, there have been some faint signs that the initial public offering (IPO) market in London is finally coming back to life. The digital bank Shawbrook said on Monday it would list its shares in the UK at a value of around £2 billion. Last week, the food and drinks company Princess Group, which makes Branston’s pickle as well as tinned tuna, said it was considering a listing in London, with a valuation of around £1.5 billion. The Beauty Tech Group made its debut on the market last Friday. And yet, as welcome as that flurry of activity is, it should not distract anyone from the wider picture.

The London market remains in a dire state. A report last week found that it has slipped to 22nd place globally for new equity issues, behind even Mexico and Qatar. The amount of capital raised through IPOs has fallen to its lowest level in 35 years, while the total number of companies listed on the exchange has fallen from close to 2,500 a decade ago to only a little over 1,500 now. Plenty of companies have shifted their listing to the US, others have decided to accept a takeover, and many entrepreneurs building new companies have decided a quote in London is no longer worth either the expense or the hassle. It could get a lot worse. There are already ominous signs that drugs giant AstraZeneca may shift its listing to the US, and BP could easily be taken over by one of its rivals.

Chancellor Rachel Reeves may have realised that something needs to be done. According to leaks, in her Budget next month, alongside the blizzard of tax rises, we may get one modest tax cut. Stamp duty could be scrapped for newly listed firms, or they could be exempted from the levy for two or three years. Investors would be allowed to buy shares without giving 0.5% of their value to the Treasury. It would be great if Reeves had finally recognised that cutting taxes can boost growth and raising them often crushes it. Perhaps she might start applying the same logic elsewhere.

But Reeves needs to be a lot bolder. Stamp duty should be scrapped completely. A levy every time a share is bought or sold is a huge competitive disadvantage compared with other markets where people can trade equities freely without being forced to pay anything to the government. Sure, it raises slightly over £3 billion, and the Treasury is strapped for cash. But in the medium term, far more tax revenue will be lost if the City turns into an irrelevance on the global equity markets. The levy is a relic of the days when the London market was so important that it could afford to be taxed when others were not. Those days are long gone.

Rachel Reeves must slash the red tape

The mess of governance codes that have built up over the last 20 years need to be scrapped, too. Quoted companies have to comply with a whole list of regulation – from diversity on the board, to controls on executive pay, to environmental and social targets – that simply don’t exist for private companies, or which are far more lightly imposed on rival markets. These rules might be well intentioned, but they impose big costs. They also take up a huge amount of managements’ time for no discernible benefit. London could lead the world in switching back to a simpler system.

Finally, why not offer entrepreneurs a tax break for listing in London?

There could be an exemption from capital gains tax for any founder who decides to float their business in the City. That would be a huge incentive over selling it to a foreign buyer or private equity firm. Who knows, it might even persuade a few of them to stay in Britain instead of moving to Dubai or the US.

The London stock market is facing extinction. The City has plenty of other businesses, from insurance to fund management to issuing debt. But the blunt truth is that there is not a major financial centre anywhere in the world that does not also have a thriving equity market at the centre of its operations. In London, that is disappearing. The LSE needs radical help – a tiny tweak to stamp duty won’t be nearly enough to save it.

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In 2026, the FTSE 100 index is likely to pass 10,000 for the first time thanks to the onward march of corporate earnings around the globe. UK investors have been remarkably reluctant to invest despite the relentless rise of equity markets: two-thirds of all ISA savings are in cash ISAs, and two-thirds of savers believe that investing is too risky.

With investors starting to discount a change to a more business- and stock market-friendly government, savers’ risk aversion should start to decline, even if the domestic economic outlook remains dismal and fears of a fiscal crisis are widespread.

Investment trusts tend to outperform a rising market, especially when, as now, there is scope for discounts to net asset value (NAV) to fall. They currently average more than 14%. Savers, whose real returns are being squeezed between falling interest rates and persistent inflation, need to cast aside their regret about missed opportunities and take the plunge. Fear about short-term volatility should not be a deterrent to the long-term returns that equity markets offer.

Where to start with UK equities

A good place to start is with the MoneyWeek portfolio, which includes two contrasting, but complementary investment trusts: the £13 billion Scottish Mortgage Investment Trust (LSE: SMT) and the £1 billion AVI Global Trust (LSE: AGT). Both invest globally, but SMT is very much a growth trust while AGT invests in value.

The five-year investment record of SMT is miserable at 27% against a 75% return from the MSCI All Country World index. But this includes the disastrous year to June 2022 when NAV fell 39% and the share price 46%, while the index fell less than 5%. This followed five years in which the NAV more than quadrupled while the index less than doubled, arguably making the managers overconfident.

After reaching a low in May 2023, both the NAV and the share price started to recover. The share price has almost doubled since then, helped by a narrowing discount to NAV as SMT has aggressively bought back shares. In the year to 31 August, both the share price and the NAV have returned 34%, compared with just 13% for the index, but the shares still trade on an 8% discount to NAV.

AGT has charted a much steadier course, with an investment performance of 90% over five years, but only a respectable 12% over one. The share price dropped 15%-20% in a couple of months earlier this year, but its moderate overall volatility and good performance explain the 6% discount to NAV at which the shares trade.

SMT “aims to identify, own and support the world’s most exceptional growth companies”. It recognises that many of these are not quoted, because private capital is more readily available than in the past, so companies are coming to the market later in their development. It believes that great opportunities would be missed or invested in unnecessarily late if it restricted itself to public equity. Private equity is limited to 30% of the portfolio, and this limit was a problem in 2021-2022 when the share prices of its quoted company holdings fell fast, and a widening discount of its shares to NAV resulted in pressure to buy back shares. Now, private equity comprises 26%, invested in 51 companies. This includes Space Exploration Technologies, the largest holding at 7.8%, Elon Musk’s venture that includes Starlink.

Also unquoted is ByteDance, the owner of TikTok and the sixth-largest holding at 3.5% of the portfolio. The remaining 73% of the £15 billion portfolio, excluding 1% of net liquid assets, is in 47 listed holdings, the largest of which are MercadoLibre, Amazon, Taiwan Semiconductor and Meta. Borrowings of £1.6 billion, 11% of net assets, imply optimism about the outlook, but will also constrain further investment.

Contrasting investment trusts

Portfolio turnover, at 9%, is low; SMT’s philosophy is to run its winners. It has multiplied its money 100-fold in Nvidia (a top-10 holding) and 21-fold in Tesla (now sub-1%). But it owns up to seven investments in the last decade, on which it has lost everything. Its managers note that you can multiply your money on a good investment, but only lose it once on a bad one.

AGT’s expectations on each investment are much more modest on the upside and much less phlegmatic on the downside. Its approach to value is very different from just seeking cheap or recovery shares around the world. Around 40% of the portfolio is invested in holding companies, usually family-controlled, where the whole is valued at much less than the sum of the parts. Examples include the media and entertainments groups News Corp, controlled by the Murdoch family, and Vivendi, controlled by Vincent Bolloré.

There is significant underlying growth in these companies, but investors suspect the controlling shareholders of being empire builders rather than value creators, hence their undervaluation. Another 31% of the portfolio is invested in closed-end funds trading on significant discounts to NAV, such as Chrysalis, Oakley and HarbourVest (all private-equity specialists). Again, there is significant underlying growth in these investments, but investors are sceptical.

The final 29% of the portfolio is invested in Japan (21%), Korea (6%) and property/other (2%). AGT saw a significant opportunity in Japan around 10 years ago with a large number of companies trading at very low valuations relative to assets, and their managements both complacent and uninterested in outside investors.

Prime minister Shinzo Abe (2012-2020) introduced reforms to shake up the corporate sector and these slowly bore fruit. In 2018, AVI launched a separate trust, AJOT, to specialise in value investing in Japan, but Japan has continued to be an important and successful focus for AGT. This year, Korea introduced similar corporate reforms, which encouraged AGT to invest there. It has identified 600 companies trading at a median price-to-book ratio of 0.7 and a median of 71% of their valuation in cash and listed securities, so the opportunity is significant.

Why pick both investment trusts?

AGT is not a traditional activist investor. Rather than a hostile approach in a blaze of publicity, it seeks to persuade company managements to realise value for shareholders. It is prepared to write open letters to management, to engage with other shareholders and to be patient, although a 36% gain after four months of holding Jardine Matheson shows that this is not always necessary.

AGT’s debt-to-net-asset ratio of 9% is similar to SMT’s, but only 16% of the portfolio is invested in North America, compared with 55% for SMT. Its portfolio is much less technology-orientated than SMT’s, but much more growth-orientated than a traditional “value” portfolio. AGT and SMT can be compared to the tortoise and the hare, but unlike in Aesop’s fable it’s not clear who the long-term winner will be. Markets and momentum now favour SMT, while AGT progresses steadily – but fortunes can change. That is why MoneyWeek’s investment-trust portfolio contains both.

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The Schroder Income Growth Fund has a clear dual objective: to deliver a reliable dividend income and long-term capital growth. Since its launch in 1995, it has raised its dividend every year, earning a prestigious “Dividend Hero” badge from the Association of Investment Companies.

Over the medium term, the trust aims to grow income ahead of inflation, helping investors preserve and build wealth in real terms.

The trust invests predominantly in UK stocks, with a bottom-up approach that seeks out mispriced opportunities. Its experienced manager draws on a long record through multiple economic cycles to identify companies where growth potential or where progress by management is overlooked.

By blending holdings that provide strong dividends today with those positioned for sustainable growth tomorrow, the portfolio is diversified by style, sector and size, helping it deliver consistently on its objectives. As sentiment towards UK equities improves, the trust’s flexibility and discipline stand out.

Three profitable UK stocks

Intermediate Capital Group (LSE: ICG) is an overlooked powerhouse in the fast-growing world of alternative assets. ICG operates in resilient, growth-orientated markets and has grown its fee-earning assets at an annual rate of 18% over the past eight years. Despite this, ICG trades at a notable discount to peers and to its own history.

Since we originally invested in it 2011, ICG has been nothing short of transformative for our shareholders. It has produced a tenfold return, powered by both capital growth and the compounding effect of rising dividends – with two-thirds of gains attributable to income.

We consider ICG not just a successful long-term investment (a “multi-bagger”), but also our highest-conviction holding, reflecting our confidence in its ability to keep compounding value well into the future.

Balfour Beatty (LSE: BBY), a construction and infrastructure group, has undergone significant transformation. When we invested five years ago, the business, once known for chasing growth at any price, was in transition. Today, it has reinvented itself, concentrating firmly on cash flow, profitability and shareholders’ returns.

Renegotiated contracts have reduced risk and improved predictability, while disciplined allocation of capital has delivered results. Over the last five years, Balfour Beatty has pursued a progressive dividend policy and repurchased over a fifth of its shares. This has led to stronger earnings, higher dividends per share, and a robust, healthier balance sheet.

While the share price has reflected these improvements, we see further upside potential.

Meanwhile, Smith & Nephew (LSE: SN), a medical-technology business, has not had it easy, with multiple changes of leadership since 2017. Yet under Deepak Nath, who became CEO in 2022, the group is showing real signs of recovery.

His three-year turnaround plan is gaining momentum. Key divisions, such as orthopaedics, have begun recovering, margins are expanding, and other divisions, such as sports medicine and advanced wound management, are growing consistently and profitably.

An enhanced focus on innovation, operating efficiency, and inventory control has improved cash flows, enabling reinvestment in the business and higher returns for shareholders via increased dividends and share buybacks. Having initiated a position in late 2023 and increased exposure since, we view Smith & Nephew as a business at a positive inflection point, with prospects for renewed growth.

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A capital markets think tank is calling for default pension funds to invest 20-25% of their equity holdings in UK companies – a weighted allocation to reverse the decline of London’s stock market. It claims two-thirds of savers believe UK pensions should invest more in domestic equities, even if returns are “marginally lower”.

New Financial, the think tank, published its findings in partnership with the Capital Markets Industry Taskforce, which is chaired by CEO of the London Stock Exchange, Julia Hoggett. She claims the UK has underinvested in itself for the past 25 years, “from infrastructure and private companies, through to the companies listed on its public markets”.

“The need to stimulate growth is profound and therefore the importance of pulling the levers required to reverse this underinvestment is equally urgent,” she added.

Despite performing well so far in 2025, UK equities are still persistently undervalued, with companies shunning London as a listing venue in favour of regions where they can secure a higher valuation, such as the US. Private equity firms and foreign buyers have also swooped in to snap up UK companies at a discount.

Last year, 88 companies either delisted or transferred their primary listing away from the London Stock Exchange, according to professional services firm EY – the most since 2009. Notable departures included Just Eat, Paddy Power’s parent company Flutter Entertainment, and equipment rental company Ashtead.

A lack of pension investment is part of the problem. New Financial says defined contribution (DC) pension schemes allocate just 4.9% of total assets to UK equities, on average. The global average for domestic equities is 13%.

The government is trying to tackle the issue through policies like the Mansion House Accord, which has seen 17 workplace pension providers voluntarily committing to invest at least 5% of assets in the UK by 2030. New Financial’s recommendations go a step further, calling for allocation of 20-25% within default funds. While savers would be able to opt out of their default fund, most stick with this automatic option.

“Vibrant public equity markets are crucial for the health of the UK economy, and a strong domestic base of pension funds really matters for UK equity markets,” said William Wright, the think tank’s founder. “Of all the options for reform that have been proposed in this debate – from doing nothing to mandation – we think the UK-weighted default fund strikes the best balance.”

What would it mean for pension savers?

The UK-weighted default fund could have a “game-changing impact” on UK equities, according to the report, increasing overall investment by around £76 billion (+230%) by 2030. But what would it mean for pension savers?

While UK equities have had a strong year so far in 2025, they have lagged their US and global peers in recent decades. UK equity funds underperformed US equity funds in 17 of the past 20 calendar years, according to LSEG data. They underperformed global funds in 12 out of 20 years.

While savers could opt out of their default fund if they didn’t want such high exposure to UK equities, the reality is that pension engagement in the UK is low. Six in 10 are not even aware their pension savings are invested, according to Hargreaves Lansdown. Nest, one of the UK’s biggest workplace pension providers serving almost 14 million members, says 99% of its members are in a default fund.

“We know that most of our members stay in the first fund they’re invested in, so we need to make sure our default fund is the right choice and does the hard work of investing on their behalf,” Nest’s chief investment officer Liz Fernando recently told MoneyWeek.

When the government announced new targets under the Mansion House Accord earlier this year, the response from industry experts was mixed. Commitments from pension schemes were voluntary, but the government has said it will take a reserve power in the Pension Schemes Bill, which would allow it to set “binding asset allocation targets”.

“This is where I have some reservations,” said Jason Hollands, managing director at wealth management firm Evelyn Partners. “Pension schemes have a fiduciary duty to deliver good returns for savers and so for any government to forcibly influence asset allocation decisions carries risk.”

The UK stock market could do with some attention, but pension savers might question whether it is their responsibility to save it – particularly when many already face significant retirement shortfalls. An alternative approach is to offer incentives.

Hollands said: “The carrot [rather than the stick] approach would be to make the UK an attractive destination for businesses and investors (both domestic and international) by having a competitive tax environment, removing prohibitive red tape, welcoming entrepreneurs from around the globe, and measures like scrapping stamp duty on share purchases.”

The government hopes its Leeds Reforms will achieve some of these ambitions.

UK stocks are still undervalued compared to international peers, but that might create enticing opportunities for value-focused investors.

The FTSE 100, an index of 100 large cap stocks (and some investment trusts) listed in London, fell 4.9% between 27 February, when it registered its highest-ever close of 10,911, and 8 June.

For UK stock investors, the decline is a disappointing reversal with the index having celebrated its best year since 2009 in 2025.

UK stocks had been trading at all-time highs prior to the Iran war’s outbreak. The inflationary shock that has resulted from this as well as persistent economic weakness has weighed on UK stocks, particularly at the smaller end of the market cap spectrum.

“Some of the challenges currently facing the UK economy will show up in different ways in different parts of the stock market,” said Tom Stevenson, investment director at Fidelity International.

“The FTSE 100 is relatively resilient during market corrections thanks to the defensive bias of its constituents and its more international focus,” said Stevenson, whereas “the FTSE 250, by contrast, is more exposed. It is more cyclical, weighted to sectors like consumer discretionary and housebuilders. It is also more domestically focused.”

Are UK stocks underrated – and if so, how can you gain exposure?

Are UK stocks undervalued?

UK stocks have been persistently trading at low values compared to international alternatives.

Analysis from Fidelity International found that the UK is one of the most undervalued of major markets based on a variety of metrics, while the US is the most expensive. UK stocks trade at, on average, around 13 times their expected 2026 earnings and 1.5 times their expected 2026 sales, compared to 22 times earnings and 3.5 times sales for US stocks.

“The UK market remains undervalued, certainly against the US,” Eric Burns, lead fund manager at asset manager Sanford DeLand, told MoneyWeek.

The relative undervaluation isn’t as extreme as it was 18 months ago, he added, largely thanks to the strong performance of UK stocks last year.

“However, when you look at what drove the market in 2025 it was quite narrowly-based, actually,” he said. “Things like defence did well, banks and resources did well.”

But in other parts of the market, the relative undervaluation persisted – and has even increased since.

“Parts of the market got completely left behind in that re-rating in 2025… that’s where I feel the performance is going to come from when we get through this holding pattern with the market that we’re seeing at the moment,” said Burns.

Could UK stocks rise in future?

The question is largely what might catalyse some sort of revival for UK stocks.

“If there is some resolution [to the Iran conflict], I think that will be the catalyst for bond yields to move a bit lower again, and for some of the momentum that we ended 2025 with to be picked up,” said Burns.

But some of the economic headwinds that the UK currently faces could be more enduring.

“In the short term it is hard to see a material re-rating of UK stocks thanks to the persistent productivity shortfall and political uncertainty,” said Stevenson. “But in the longer term the UK is home to many good companies, which are available at undemanding valuations.”

How to invest in UK stocks

To invest in UK stocks, you can either buy them directly, or choose funds or investment trusts that offer exposure to the market.

Burns picked out London Stock Exchange Group (LON:LSEG) (LSEG) and RELX (LON:REL) (formerly Reed Elsevier) as examples of British stocks that have been harshly sold off thanks to a misplaced perception that their business models are susceptible to disruption from artificial intelligence.

“They’ve got a hell of a lot of data,” said Burns. “The market is giving them no credit for that – quite the opposite… I think in three to five years’ time those businesses are going to look like fantastic investments.”

Tracker funds can give you exposure either to the whole UK market, or to specific indices. One option for the entire market is the Vanguard FTSE U.K. All Share Index Unit Trust; this tracks the FTSE All-Share Index which comprises more than 600 large-, mid- and small-cap UK stocks.

A FTSE 100 tracker like the HSBC FTSE 100 UCITS ETF (LON:HUKX) would be ideal for passive large cap exposure, while one tracking the FTSE 250, such as Vanguard’s FTSE 250 UCITS ETF (LON:VMIG), would do the same for mid-caps.

For passive small cap exposure, you could try the iShares MSCI UK Small Cap UCITS ETF (LON:CUKS).

If you prefer an active strategy, Artemis smartGARP UK Equity has performed strongly over the five years to 30 April, returning 124% during that time.

Investment trusts can also offer active exposure to UK stocks: Fidelity Special Values (LON:FSV) invests in unloved UK companies of all sizes and gained 62% in the five years to 30 April, while Rockwood Strategic (LON:RKW) targets UK small cap stocks in particular and returned 105% in the five years to 31 March.

On 8 October, UK retail investors will once again be able to invest in Bitcoin exchange-traded notes (ETNs), which will be listed on the London Stock Exchange.

The UK financial regulator, the Financial Conduct Authority, banned them in 2020, saying that crypto assets cannot be reliably valued by retail consumers because “these assets have no reliable basis for valuation”.

It was also concerned about “the prevalence of financial crime, extreme volatility, inadequate understanding by retail consumers, and the lack of legitimate investment need.

These features mean retail consumers might suffer harm from sudden and unexpected losses if they invest in these products”.

This accurately described many crypto assets at the time, but I believe it was heavy-handed to include Bitcoin, along with the other major projects such as Ethereum.

Other countries have recognised this, and it is right that Britain should do the same.

In 2020, Bitcoin was emerging as an institutional asset, as it already had an active futures contract in the US.

Bitcoin exchange-traded funds, or ETFs, were launching in Switzerland, Germany, Brazil, Hong Kong, and Canada, and a US version was being discussed. (In Europe the ETFs are often called ETNs or ETPs, exchange-traded products.) The US ETFs were approved in January 2024.

They were a huge success, and the iShares Bitcoin Trust has grown into an $88 billion product, marking the most successful fund launch in BlackRock’s history. Two months later, the UK regulator revised its 2020 statement, saying that crypto ETNs could list in a new segment on the London Stock Exchange dedicated to professional investors only. It reiterated that crypto assets were “high risk and largely unregulated. Those who invest should be prepared to lose all their money”.

Then, as Bitcoin has enjoyed three years of relative calm, in June this year the Financial Conduct Authority (FCA) announced it would lift the ban on crypto ETNs for UK retail investors. “This consultation demonstrates our commitment to supporting the growth and competitiveness of the UK’s crypto industry. We want to rebalance our approach to risk and lifting the ban would allow people to make the choice on whether such a high-risk investment is right for them, given they could lose all their money.”

Catching up with the world on Bitcoin

The FCA recognised that Bitcoin was thriving and that the UK had become an overly cautious outlier. London is a major financial centre, and banning innovative financial products, risky or otherwise, would ensure London’s long-term irrelevance.

A little regulation is a good thing, but too much will certainly kill you. Some of its concerns were legitimate, because many crypto assets are intrinsically worthless. But Bitcoin, along with some other important crypto projects, stand out from the crowd.

For example, crypto assets are volatile, but even in 2020, Bitcoin was much less so than the rest. Its 360-day volatility was in line with Marks & Spencer or Legal & General at the time, and today it is even lower.

Bitcoin has also inspired many innovations, such as the stablecoin, enabling cash transactions in real time over the internet, and non-fungible tokens, which pave the way for the tokenisation of real-world assets. There have also been bright ideas in decentralised finance (DEFI), new trading technologies, and perpetual futures contracts. Many of these ideas are finding their way into mainstream markets. I think the next generation will not differentiate between equities and crypto as they will essentially merge.

Yet still to this day, many ask what Bitcoin's purpose is, and what value does it represent? I think the answer is simple, and the clue lies in its high correlation with the technology sector. While many describe it as electronic gold, its price doesn’t behave like it. It correlates with technology stocks because it is a technology. It has become the de facto reserve asset of the internet.

When you consider how fast AI is growing, and that it operates 24/7, can traditional banking keep up? Bitcoin trades instantly and settles within minutes. It is a very liquid asset trading around $40 billion each day, which is not as much as gold’s $150 billion, but is more than the most liquid stocks in the world, and growing.

The history of crypto regulation in this country mirrors the development of the asset.

As Bitcoin has matured, the regulator has shifted its stance.

At the time of the ban on 6 October 2020, the price of Bitcoin was £8,189. Today it is £84,497. There must have been concerns that Bitcoin was extremely risky, because I cannot recall a case where investors have been prevented from buying a publicly traded asset before.

In UK regulatory circles, we should presume that Bitcoin was seen to be highly toxic. As the FCA is at pains to point out, Bitcoin might still lose you all of your money, but it is also recognised that it could do the opposite.

For those who are intrigued but wary, I have the solution. By holding the 21Shares Bitcoin and Gold ETP (Zurich: BOLD), you get the best of both worlds. It tracks the BOLD index, which I created five years ago. By regularly rebalancing, it adds value by taking profits from the stronger asset, and adding to the weaker, which also keeps a lid on risk. And by owning gold alongside Bitcoin, losing all of your money becomes impossible.

Charlie Morris is the CEO and founder of ByteTree. It offers investment research for private clients through the Multi-Asset Investor (bytetree.com/the-multiasset-investor), in addition to other research services.

This article was first published in MoneyWeek's magazine. Enjoy exclusive early access to news, opinion and analysis from our team of financial experts with a MoneyWeek subscription.

The City is meant to be leading the world in the drive towards “green finance”. But over the past few weeks, it has become clear that it has found reverse gear. Patrick Tiernan, the new CEO of the Lloyd's insurance market, a sector where London is still a world leader, last week indicated that syndicates would no longer be pressured into refusing to cover fossil fuels.

He stressed that the market wanted to be “apolitical”. Earlier in the month, the Net Zero Banking Alliance, a UN-sponsored initiative of which the former Bank of England governor Mark Carney was one of the founders, said it was pressing pause on its work after a whole series of major banks, including Goldman Sachs, HSBC and Barclays, decided to leave. Likewise, a lot of environmental, social and governance (ESG) funds are going to be looking a lot less healthy as the share price of Orsted, one of the favourite stocks for the sector, collapses. Shares in the Danish wind giant have halved in the past year. It turns out it’s a lot harder to make money from windmills than was first predicted. Add it all up, and one point is clear. The “green transition” investment story is turning very sour.

The City's bet on green finance fails to pay out

Much of it was virtue-signalling nonsense from the start. Whatever you think about climate change, fossil fuels are likely to be around for at least a couple more decades, even on the most optimistic scenarios, so it’s hard to see the point of not insuring the companies that produce them. It just meant there was no money to pay out compensation if something went wrong. Likewise, if the major banks refuse to finance fossil fuels, then the companies will just be forced to turn to hedge funds and private credit instead, and the risks will be far harder for central banks to monitor.

At the same time, it was all very well to mobilise the fund-management industry behind green investment, but as Orsted has shown, just because you stamp “climate change” on a project doesn’t mean it will make any genuine profits. As subsidies get wound down, much of the sector turns out to be fundamentally unprofitable – and if the banks are too heavily exposed, they will only find themselves in trouble.

The City’s bet big on “green finance” driving its growth over the next couple of decades. Everyone knew that leaving the EU would pose a challenge to London as a financial centre, even if it was sometimes exaggerated. The City was the key financial hub for the bloc, financing government and corporate debt, and managing bond and equity issues. As some of that business drifted away, as it inevitably would, London was meant to turn itself into the global centre for “green finance” instead. It would become the place where the hundreds of billions that would have to be invested to transition from oil and gas to wind, solar and nuclear power would be financed, and where environmentally friendly companies could list, and where ESG fund management would flourish. It would be the world’s green finance centre, not just Europe’s. Cheerleaders such as Mark Carney predicted that green finance would be a $5 trillion market. It was the City’s future.

Green finance turns sour

This bet has not worked out well. Over the past five years, the City has stagnated. The number of new companies listed in London has shrunk to almost nothing, very few major bids have been launched, and there is not much sign of the green boom we were promised. That is about to become a lot more apparent as many of the deals struck over the past few years turn sour. We have already seen the best years of green finance, when governments were pouring unlimited sums of money into industries such as wind and solar. We are now seeing a retreat, and that will expose a lot of dud projects.

There has to be a reset. The City needs to start growing again and to replace the markets lost by Brexit. It is not going to be green finance, that much is now clear. London’s financial markets need to ditch the green delusion and move on as quickly as possible – and get back to businesses where they can actually make money.

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UK small caps are lagging behind larger counterparts, both domestically and overseas, in terms of their valuations. But their growth prospects are stronger than ever.

Their smaller size may mean these growth stocks are rarely among the top stock picks for DIY investors, but this unloved sector could be set to rebound.

For a start, UK stocks look historically undervalued across the board. Tom Grady, value fund manager at Schroders, explains that UK stocks have historically traded at a 20% discount to US counterparts in terms of their average price to earnings (PE) ratio, but that this has widened to over 40% in recent years.

But, it isn’t just about being cheap. Some stocks are cheap for a reason, but this doesn’t appear to be the case for UK stocks on the whole.

Grady compares five-year revenue growth and five-year return on equity of the FTSE All-Share index to the US’s S&P 500, and points out that while “some US companies do enjoy exceptional growth and profitability… the majority of firms in both markets operate within a similar performance range.”

With UK equities due to stage a recovery, small caps could be an excellent way for value-driven investors to ride the wave.

Value and growth for UK small caps

While UK stocks in general are undervalued, the country’s small-cap stocks are particularly unloved.

This seems unwarranted. UK small companies offer better growth prospects than many larger counterparts, including one of the pre-eminent growth stock indices, the NASDAQ Composite, according to Octopus Investments’ latest Growth Barometer Report.

As well as being cheaper based on their projected profits, the AIM All Share index is expected to post greater profit growth than the Nasdaq over the next two years, with the AIM 50 (the largest 50 stocks on the exchange) not far behind.

^{Source: FactSet estimates / Octopus Investments, July 2025}

Despite these superior growth prospects, UK small caps’ valuations have fallen, even as their profit forecasts have risen.

^{Source: FactSet estimates / Octopus Investments, July 2025}

“The share prices of companies listed on AIM have suffered a difficult few years driven by negative fund flows,” said Richard Power, head of quoted companies at Octopus Investments. “What this has masked is the exceptional earnings growth that AIM companies have continued to deliver.”

Though AIM stocks will become subject to inheritance tax (IHT) from April 2026, the market is home to several companies that could be set to post strong profitability growth despite trading at fairly modest valuations.

Advanced Medical Solutions (LON: AMS) is one example. Peel Hunt expects the biotech business to grow profits by 51% between its 2024 and 2027 financial years, but the stock trades at just 15x its expected earnings for 2025 (and around 12.5x expected earnings in 2027).

UK small cap growth is accelerating

Smaller UK companies have started to gain some momentum in recent months.

“We believe we are still in the early stages of recovery for smaller companies, with further upside potential,” said Abby Glennie and Amanda Yeaman, investment managers of abrdn UK Smaller Companies Growth Trust (LON:AUSC).

UK large caps made a stronger start to the year, but this has reversed following the tariffs that were announced on 2 April, ‘Liberation Day’.

From this turning point, “we saw a strong rally in small caps, and small caps outperformed large caps in the second quarter,” say Glennie and Yeaman. “This was driven by the market being more positive towards UK domestics, which are more prominent in UK small cap than they are in the very global FTSE100.”

Sentiment has wobbled in recent weeks thanks to political turbulence and concerns over potential tax rises in the Autumn Budget. But if optimism returns, it should in theory see a reversal of the price performance declines that have hampered UK small caps over recent years.

“Once sentiment towards the UK improves, we believe this progress will be reflected in share prices offering investors the potential for significant upside from today’s depressed market levels,” said Power.

It is also worth noting that much of the pessimism towards UK business comes from UK investors, while international investors are taking a more positive stance towards UK stocks.

This is borne out by analysis from Schroders which shows US investors put more money into UK equities than any other market during the first five months of 2025.

“We think a lot of the pessimism on UK markets is actually coming from UK-based investors,” say Glennie and Yeaman. “There is plenty of data to show the UK doesn’t look so rosy, but actually compare it to many of the other major geographies and it’s certainly no worse.”

Investing in high-growth UK small caps

Investors can buy some UK small cap companies directly, though not all brokers will allow users to buy AIM-listed shares.

Alternatively, they could buy investment trusts with a focus on UK smaller companies. Investment trusts in this sector currently trade at an average discount to their net asset value of 11.3%, according to data from the Association of Investment Companies as of 8 September. AUSC’s discount is 9.0%.

Investors who favour passive over active exposure could select an index fund like the Amundi Prime UK Mid & Small Cap ETF (LON:PRUK) which tracks the Solactive United Kingdom Mid & Small Cap ex Investment Trust Index. Top holdings as of 2 September include industrial technology company Spectris (LON:SXS), banking group Investec (LON:INVP), fund manager Aberdeen (LON:ABDN) and materials business Johnson Matthey (LON:JMAT).

The London Stock Exchange (LSE) has been given the green light to operate a Pisces platform, a new type of private stock market.

The Financial Conduct Authority (FCA) confirmed on 26 August that the London Stock Exchange had become the first operator to receive approval to run Pisces, the world’s first regulated private stock market.

Pisces - which stands for Private Intermittent Securities and Capital Exchange System - is a marketplace that will allow investors to buy and sell shares in private companies.

Plans to launch the market were announced by the chancellor in her Mansion House speech last November.

Emma Reynolds, economic secretary to the Treasury, said the London Stock Exchange gaining FCA approval was the “latest significant milestone” for Pisces.

She added that the government was “committed to working with the regulators and business to enhance our capital markets offering, supporting economic growth, and putting more money in working people’s pockets”.

Julia Hoggett, CEO of the LSE, commented: “We look forward to welcoming the first private companies to utilise the market when they have completed their preparations and to expanding the options they will have to realise their ambitions.”

Pisces is not open to all retail investors. We explain how the market works, when it will launch and which people will be able to buy and sell shares.

How will Pisces work?

Pisces is a new type of private stock market that gives investors more opportunities to buy stakes in growing companies.

It’s aimed at boosting liquidity in private markets and encouraging large start-ups and scale-ups to list in London.

It’s different to a public market listing, instead Pisces platforms will run “intermittent” trading events. For example, companies using a Pisces platform can control when their shares may be traded and who can buy their shares.

While the LSE is the first operator to be approved to run Pisces, we could see more Pisces platforms approved. London’s challenger stock exchange Aquis is said to be looking at launching one.

It’s not clear what fees will be involved in terms of buying and selling shares, however the government has proposed that Pisces share transactions be exempt from stamp duty.

Who can buy and sell shares on Pisces?

Pisces will generally be restricted to institutional investors, high net worth individuals and employees of participating companies.

In terms of a high net worth individual, the FCA defines this as someone who earns at least £100,000 (not including any one-off pension withdrawals) or holds net assets to the value of £250,000.

Sophisticated investors (including self-certified) may also be able to trade shares; being classified as a sophisticated investor usually requires you to have relevant investment experience and knowledge.

Companies on Pisces can restrict who can buy their shares, if these restrictions promote or protect their legitimate commercial interests, according to the FCA.

However, they are not allowed to impose any new restrictions on which investors may sell their shares.

Under Treasury rules, employees of companies with shares traded on Pisces platforms can either buy shares in the company that employs them, or sell their existing shares.

Michael Healy, UK managing director at investment and trading platform IG, comments: “It's frustrating access has been restricted to institutional investors, high net worth individuals, and employees of participating companies. This cuts out most retail investors, meaning the UK risks falling behind recent developments in the US.”

When will it launch?

The London Stock Exchange says it will launch its Pisces platform later this year.

The FCA is currently testing the design before finalising a permanent regime in 2030.

Which companies could launch on Pisces?

Revolut, Octopus Energy, ClearScore and SME lender Oaknorth have been reported as some of the companies that may be interested in listing on Pisces.

Dan Coatsworth, investment analyst at AJ Bell, tells MoneyWeek that the platform could be useful for fast-growing fintechs looking for institutional investment and also an opportunity for staff to exit their shareholdings.

He adds that Pisces won’t replace an established stock market like AIM as it will not support capital raising and it won’t be open to the general public.

However, it may “whet the appetite” of a company to then go on and seek a listing on the stock market.

“Pisces could help private companies get used to the idea of slices of their business being owned by different people.

“It might act as a stepping stone towards a public stock listing, getting them used to regular financial reporting, transparency as a business, and understanding that a company is run for the best interests of shareholders, not the board of directors,” he notes.

Past performance is not a reliable guide to the future. However, investors’ portfolios can benefit from UK shares that have consistently and substantially outperformed the stock market. One of the best ways of measuring consistent outperformance is to select several different time periods, over all of which a company’s shares should have outrun the market.

We will take one-year, six-year and 12-year periods and look for companies that have gained more than the FTSE 100 over all three time spans. Six and 12 years are chosen since five years would take us back to 2020, when stocks were slumping owing to Covid. It is more reliable to measure growth from 2019 to 2025.

Taking 16 April 2025 as our reference date (after stocks reacted to Donald Trump’s tariffs), the FTSE 100 had gained 5.8% over one year, 11.6% over six and 28.7% over 12 years. There are at least 12 British companies from several different sectors that have easily beaten the blue-chip index over all three periods. We will discuss these 12, examine the reasons they have done so well and gauge whether their outperformance will continue.

Two stocks leading the pack

Two companies from the 12 stand out as having exceptional outperformance. These are Games Workshop and 3i Group, both FTSE-100 firms. Games Workshop has gained 45% in a year, 248% over six years and 1,997% over 12 years. In 3i’s case, its shares have gained 48% over one year, 287% over six years and 1,161% over 12 years. Games Workshop’s gains are even better than those of Magnificent Seven US firms, such as Amazon, with -4%, 73% and 1,230% over one, six and 12 years, respectively and Alphabet (Google’s parent company) with -4%, 145% and 615%. The gains made by 3i beat Alphabet over all three periods and Amazon over all but 12 years.

Games Workshop’s best-known product is the Warhammer series of games. Hobbyists of all ages enjoy collecting, modelling, painting and tabletop-gaming with their miniatures. This hobby is global and supported by a wide range of books, audio books, electronic games and Warhammer TV. Games Workshop supplies its global hobbyists through its own stores or trade outlets, and by licensing its deep and extensive range of intellectual property. It has just concluded negotiations with Amazon for adapting the Warhammer 40,000 universe into films and TV series, together with associated merchandising rights.

3i Group is an investment company specialising in private equity and infrastructure. It invests in mid-market companies in Europe and North America. Its private-equity (PE) portfolio has over 50 companies, with about half that number in the infrastructure portfolio. Action is an example of 3i’s PE portfolio companies. Based in the Netherlands, it is the fastest-growing non-food discounter in Europe with 2,918 stores in 12 countries. Action reported sales growth of 10.3% for the year to December 2024 and paid a dividend of £215 million to 3i, leaving it with a cash balance of €814 million.

Defence stocks

Our 12 companies include three from the aerospace and defence sector: BAE Systems, Cohort and Rolls-Royce. All three have benefited from the realisation by major European countries that they can no longer regard the US as a reliable ally, given Donald Trump’s behaviour since taking office in January. European countries have realised that they need to increase their support for Ukraine and raise their defence budgets to over 3% of GDP – a figure that, among large countries, only Poland exceeds at present, with 4.2%.

It is raising this figure to 4.7% this year. The UK government has pledged to raise its defence budget from 2.3% to 2.5% of GDP by 2027 and to 3.5% after that. Other European countries are also making substantial increases. These changes have led to sharp increases in the share prices of European defence companies since early January this year.

Cohort is a group comprising seven innovative firms providing satellite, military and naval communications; advanced electronic and surveillance technology; data technology; and naval sonar systems. One of these seven is EM Solutions, an Australian developer and producer of high-end satellite-communications terminals for naval and defence customers. Australia is an increasingly important defence market, as highlighted by the recent AUKUS agreement. Cohort’s share price has risen 68% over one year, 237% over six years and 863% over 12.

BAE Systems designs and makes a broad range of defence equipment for global customers. Offerings include land, sea and air systems, with products such as combat vehicles, artillery systems, complex naval surface ships and fighter jets. The group also focuses on military electronics, intelligence and cybersecurity.

The company develops the future technologies on which new products are based and also offers a full spectrum of services from engineering to information management. One example of a future technology is the Tempest programme, which is a joint British, Italian and Japanese collaboration to develop and manufacture an advanced fighter jet independent of the US. It will incorporate a wide range of new technologies. BAE’s share price is up 32% over one year, 253% over six years and 364% over 12 years.

Rolls-Royce has three divisions. In defence, it is the market leader in military aircraft engines, naval propulsion and nuclear propulsion for submarines. When it comes to civil aerospace, it produces engines for large commercial aircraft, regional and business jets. Its power systems business includes power generation for data centres, manufacturing and utilities.

Rolls is developing small modular nuclear reactors (SMRs) to provide a low-cost, clean power source – each SMR being capable of powering a million homes for 60 years. Rolls has been selected as the supplier of sets of SMRs for the UK, the Czech Republic and the Netherlands, and is shortlisted for orders in Sweden. The share price is up 82% over one year, 131% over six years and 87% over 12 years.

Data providers

Our 12 companies include two major providers of data, RELX and London Stock Exchange Group (LSEG). RELX provides leading content and data sets with information-based analytics and decision tools to customers in 180 countries. For example, the legal profession is served by LexisNexis, which hosts over 161 billion documents and provides searches, analytics and AI capabilities. RELX is up 18.5% over one year, 123% over six years and 421% over 12 years.

LSEG comprises three major divisions. One is data and analytics, which includes trading and banking, enterprise data, and investment solutions, including indices. It makes up 63% of profits. Then there is the capital markets division, focusing on equities, foreign exchange, and fixed income. The post-trade arm covers derivatives, securities and reporting. LSEG’s shares are up 24.4% over one year, 127% over six years and 821% over 12 years.

Engineering stocks

Two engineering companies in our 12, Diploma and Halma, have grown steadily through both organic growth and successfully integrated acquisitions. Halma has a magnificent record of having raised its dividend at least 5% every year for 46 years.

Diploma has three main arms – controls, seals and life sciences – which all supply specialised products and services to sectors such as healthcare and environmental management. Offerings include industrial automation equipment, specialised cables, adhesives, fasteners and controls. The group made two acquisitions in each of 2023 and 2024. Diploma’s shares are up 8.5% over one year, 139% over six and 570% over 12 years.

Halma consists of 55 decentralised businesses operating in three segments: safety, environmental and analysis, and medical equipment. Halma buys small and medium-sized firms to secure the leading market share in a range of niche markets. It has acquired 55 companies, but also invests strongly in research and development (R&D) to ensure its products rate as the best available in their niches. Its shares are up 21% over one year, 48% over six and 433% over 12 years.

Specialised engineering and retail

Our specialised engineering businesses are Concurrent Technologies in electronics and Goodwin in mechanical and refractory engineering. Concurrent supplies the aerospace and defence, telecoms, transport, scientific and industrial sectors with high-end embedded computer products. Products are made to perform reliably in extreme conditions, such as shock, vibration and extreme temperatures/humidity. Concurrent’s shares are up 83% over one year, 99% over six years and 221% over 12 years.

Goodwin’s mechanical engineering consists of the manufacture of high technology castings, valves, antennae and pumps. Clients include the aerospace and defence, mining, oil and gas, water and power-generation industries. Goodwin Steel Castings makes specialised castings for frigates and submarines.

The refractory engineering arm makes refractory powders and processes them for the jewellery, aerospace and fire-protection industries. Four of five directors are members of the Goodwin family, and 56% of the shares are family-controlled. Goodwin’s shares are up 12.7% over one year, 129% over six and 230% over 12 years.

Next is a top-class retailer. Sales jumped 32% between 2021 and 2024. Next sells clothing, accessories, footwear and home products and operates through three main segments: Next online, Next retail and Next finance. I remember interviewing Simon Wolfson, Next’s CEO, along with other CEOs and chairmen for the UK government’s business department when I was a senior industrialist there. I was impressed by both his grasp of detail and his clear strategic thinking, and he has guided Next’s profitable growth. The shares are up 36% over one year, 108% over six years and 175% over 12 years.

How do our 12 stocks compare?

The share price growth of all 12 companies discussed above has vastly exceeded that of the FTSE 100. The FTSE grew 28.7% over 12 years, but eight of our 12 stocks grew more than 10 times as much (more than 287%). The FTSE grew 11.6% over six years, but 10 of our 12 rose over 10 times faster.

Given that the FTSE 100’s performance is modest, it is interesting to compare our 12 companies with America’s S&P 500, which has gained 4.4% over one year, 79% over six and 230% over 12 years. Over 12 years, eight of our firms beat the S&P and one equalled it. Over six years, 11 of our 12 beat the S&P and, over one year, all 12 beat the S&P 500.

Our 12 businesses are all profitable and all pay dividends. However, all invest in growth, so forward dividend yields are modest, ranging between 1% and 2%. The highest forward yield is from Games Workshop, with 2.72%.

Valuations and growth drivers

Games Workshop (LSE: GAW) is on a forward price/ earnings (p/e) ratio of 32. In the six months to 1 December, 2024 revenue rose 21% and operating profit 34%. The firm continues to grow briskly and there is still ample scope for it to exploit its intellectual property to expand its licensing income.

3i Group (LSE: III) has a forward p/e of nine. The 2024-2025 results to 31 March delivered an increased return on shareholders’ funds of 25%, while net debt was down to £771 million; gearing was 3%.

Cohort (LSE: CHRT) has a forward p/e of 25.8. The results for the half year to 31 October 2024 showed sales up 25% at £118.2 million, while the order book jumped 53% at £541 million. The May trading update reports strong revenue and profit growth.

Rolls-Royce (LSE: RR) has a forward p/e of 39. In 2024 sales grew 17% to £18.9 million and underlying operating profit rose 53%. Cash-flow growth of 88.7% enabled a £1 billion share-buyback programme for 2025. The 2025 outlook was upgraded. There are clear growth drivers for all three segments.

BAE Systems (LSE: BA) has a forward p/e of 25.8. The 2024 results show sales up 14% to £28.3 billion, underlying EBIT of £3 billion and an order book of £60.4 billion (over two years of sales).

RELX (LSE: REL) sells for 30 times forward profits. The 2024 results show sales up 14.7% to £18.9 billion, operating profit up 49.7% to £2.9 billion and net cash of £475 million.

London Stock Exchange Group (LSE: LSEG) has a forward p/e of 26 at a share price of 10,675p. The 2024 results show income up 6.1% to £8.5 billion, operating profit up 6.7% to £1.5 billion and free cash flow of £2.2 billion. The first products from the partnership with Microsoft are now reaching customers, with more planned through 2025.

Halma (LSE: HLMA) has a forward p/e of 31 at a share price of 3,206p. Halma completed seven acquisitions in the year to 31 March, has a healthy acquisition pipeline and a strong balance sheet to fund it. It delivered record 2024-2025 revenue up 11% at £2.25 billion, with EBIT up 12% at £411 million and the total dividend up 7% . This is Halma’s 22nd consecutive year of record profits. Net debt to EBITDA was reduced to 0.97 (down from 1.35 a year ago). Halma says it has made a strong start to its new financial year.

Diploma (LSE: DPLM) has a forward p/e of 27.8. The full year results to 30 September 2024 showed sales up 13.6% to £1.36 billion and operating profit up 11.3% to £207 million. The May interims showed sales up 14% with the operating margin climbing to 21.5%.

Goodwin (LSE: GDWN) has a trailing p/e of 29. Revenue for the year to 30 April 2024 was £191 million with operating profit of £26.9 million and net debt of £35.4 million. The March 2025 trading update reported that the order book had reached a record £300 million and that both the mechanical and refractory divisions are seeing strong growth, with debt cut by a further £10 million.

Concurrent (Aim: CNC) has a forward p/e of 29 at a share price of 193p. The results for 2024 show record sales up 27% at £40.3 million, pre-tax profit up 40% to £5.2 million and cash climbing 23% to £13.7 million. The company says that 2025 has started strongly in terms of both output and orders.

Next (LSE: NXT) has a forward p/e of 17. Revenue to 31 January 2025 was up 11.4% to £6.12 billion, with operating profit up 12.7% to £1.09 billion (exceeding £1 billion for the first time). Growth is driven through the Next brand, the Next online platform and product development. Next’s branded sales through its international websites have grown 350% over the last ten years and sales through third-party platforms now account for 30% of global sales.

Selecting your stocks

Given these 12 firms’ excellent growth records, it is no wonder seven of the 12 have forward p/es between 25 and 30, three over 30, one between 15 and 20, and just one, 3i Group, below 10 (9). A diversified group of five or six stocks for investment might include Games Workshop, one of the three defence companies, one of the two data companies, one or two of the four engineering companies and either Next or 3i.

This article was first published in MoneyWeek's magazine. Enjoy exclusive early access to news, opinion and analysis from our team of financial experts with a MoneyWeek subscription.

Things haven’t been great for the UK stock market over the last two decades. Indeed, the City has been a “serial underachiever”, especially when compared with the US, says Andrew Jones, a portfolio manager on the global equity income team at Janus Henderson. It has seen poor returns, and there have been significant outflows from the market. UK equity funds have experienced net withdrawals for several years in a row. There has been an exodus of firms quitting the London market, going private instead, or heading for the American exchanges, and in some quarters this has given rise to the perception that the UK market is (or may become) “uninvestible”, as Jones says. There are, however, some rays of hope. An “uptick” in performance over the past few months has seen the FTSE outpace the US market. With valuations at “attractive” levels, this looks like a good time to start backing Britain.

UK stock market problems

Some of the poor performance of UK-listed shares is down to factors beyond anyone’s control, as investors naturally tend to gravitate towards the companies that are seen as “fast-growing”, says Michael Field, chief equity market strategist for Morningstar. Over the last 15 years, a large chunk of this growth has been come from a handful of large tech firms, initially in the form of the FAANGs (Facebook, Apple, Amazon, Netflix and Google) and more recently the “Magnificent Seven” (Meta, Microsoft, Alphabet, Amazon, Apple, Nvidia and Tesla). Their success has made the US “the place to be invested at the moment”, which has, in turn, taken “the limelight away from both Europe and the United Kingdom”.

Conversely, sectors traditionally associated with the UK market have fallen out of fashion. Chris Beauchamp, IG Index’s chief market analyst, points to shares exposed to commodities, which “faded once it became clear that the rise of China wasn’t going to lead to the expected boom in demand”. George Ensor, partner and portfolio manager at River Global, notes that while historically small caps have beaten their larger rivals by around 3%-4% a year, the cycle has turned against them, and “he can’t think of a single market around the world over the past four years where small firms have outperformed their larger counterparts”.

Some of these wounds have been self-inflicted. Chris Morrison of Jupiter Asset Management’s UK Income Fund argues that political turmoil, from the Brexit vote in June 2016 to the “disastrous” Liz Truss budget of 2022, has “knocked international investors’ confidence not only in the UK’s ability to grow, but also to balance its books”. Sentiment matters too. Britain’s current government says that “things will get worse before they get better”. Investors understandably find this approach somewhat less appealing than America’s current emphasis on “making America great again”. Tom Wildgoose, head of equities at Sarasin & Partners, agrees that in the UK we do “have a habit of talking ourselves and our companies down”.

Such problems have just piled on top of the underlying structural ones. US markets have benefited from the willingness of both American institutional and retail investors “to take on huge amounts of risk, which has given their firms access to large pools of capital”, says Simon Pryke, executive chairman of Findlay Park Partners. By contrast, British investors have proved to be much more risk-averse. Keith Hiscock, chief executive of Hardman & Co, notes that successive waves of regulations have also forced pension funds to shun shares in favour of bonds, in order to cover their liabilities, and many of them have shifted their remaining shareholdings from domestic to global index funds. All these things have weighed on the British stock market.

Finding value in the UK stock market

The poor performance of the UK market over the past few years may have caused frustration for investors, but it has also made its shares attractive from a valuation perspective. The UK market has nearly always traded at a discount to the US of around 10%-20% in terms of price/earnings and price/sales ratios, but today the “discount to the discount” is of around 30%-40%, say James Harries and Blake Hutchins of Troy Asset Management. And the US market isn’t the only one that the UK trails – “there are plenty of great London-listed companies that are trading at much lower multiples than comparable companies listed in other countries”.

Job Curtis, portfolio manager of the City of London Investment Trust, agrees that UK markets appear cheap. He notes that UK companies also provide a much better income than those in other countries. So even if valuations don’t improve, you will still benefit from getting more in dividends than you would elsewhere. UK firms may have faced criticism in the past for putting payments to shareholders above future investment and balance-sheet stability, only to be forced to slash dividends when things turn sour, but today’s dividends “are on a much more solid basis” in terms of dividend cover (the ratio of dividends to earnings).

British companies are also taking advantage of the low valuations to buy back their own shares, which helps investors by boosting earnings per share. Andrew Jones of Janus Henderson notes that (as of 30 June) the UK has one of the higher distribution yields (the combination of dividends and buybacks), with the FTSE 100 at 6.1%, compared with 4.4% for France’s CAC 40, 3.5% for the German DAX and only 2.4% for the S&P 500. UK investment trusts are also trading at a much higher discount than normal to the value of the net assets in their portfolio. According to data from the Association of Investment Companies, as of June the average discount is 12.7%. This is less than the 18.9% it reached in October 2023, but still substantially below the average of the last 17 years of around 8%.

Takeover mania

Just because shares are cheap doesn’t mean the valuation gap will necessarily close, of course.

“People have been saying this for quite a while and nothing has happened,” as Wildgoose points out. But a catalyst for change this time could be the large number of firms being bought out. That is a “double-edged sword”, says Iain Barnes, chief investment officer of UK wealth manager Netwealth, as it could lead to a diminishing number of listed firms and a “shrinking market” in the longer run. But it could help push up the valuations of UK shares “as people anticipate interest from these buyers, nudging prices in some sectors higher”.

Like it or loathe it, the foreign appetite for British companies is not going away. Expectations that it might be a short-term phenomenon have been disappointed and takeovers have become a “well-established” feature of the British market. A large number of “pretty significant takeovers at pretty high premiums” are taking place this year, as Charles Hall, head of research at Peel Hunt, points out. A case in point is the industrial company Spectris, which was taken over a few weeks ago after KKR gazumped rival Advent with an offer that was nearly double the prebid price. As Hall puts it, “the fact that two private-equity funds were willing to engage in such a battle tells you all you need to know about the UK market”.

It isn’t just private-equity firms with cash to burn that are looking around for British companies, either. Hall points out that the majority of the interest is coming from American firms, even though corporate buyers tend to be much more “risk averse” when it comes to buying other companies. Overall, the average premium paid has been around 40% so far this year, only slightly lower than the 45% that companies were willing to pay in 2024. This suggests that US companies have not been put off by president Donald Trump’s tariffs on the UK and that the UK has “gone from being at the bottom end of investors’ sentiment, to much closer to the top end of markets that are seen as desirable”.

Improving fundamentals

Interest from abroad may help boost valuations, but “it is not a long-term solution” to the languishing UK market, says Tony Dalwood, CEO of Gresham House. Fortunately, the fundamental outlook for UK shares is also “improving”, he says, thanks to “strong fundamentals”. He particularly likes the fact that the Aim junior market “continues to be a critical platform for high-growth businesses”, while the main market continues to list many “world-class companies”, particularly in the pharmaceutical, financial, support-services and infrastructure and energy sectors. Going forward, these companies should act as a “key driver in boosting the performance of the UK market and closing the valuation gap”.

George Godber and Georgina Hamilton of Polar Capital agree that although UK economic growth has been “anaemic” in recent years, things are starting to look up. Since the pandemic, UK consumers have been saving more and consuming less, motivated by an uncertain economic outlook and the need to refinance mortgages. But consumers’ confidence is on the rise and, along with the interest-rate cuts that are on the horizon, this “should help to boost the economy”.

Trump’s decision to impose swingeing tariffs in April, combined with his impulsive behaviour and frequent policy changes, has also made investors, both in the UK and around the world, “think that they might want to put more money into non-dollar assets”, say Godber and Hamilton. Political uncertainty in the UK, on the other hand, is starting to dissipate, especially in sectors such as energy, says Jean-Hugues de Lamaze, manager of the Ecofin Global Utilities and Infrastructure Trust. Hence UK companies in those areas are starting to seem a lot more attractive.

Saving the UK stock market

One political change that could have a big impact on the UK stock market is the increasing recognition that something needs to be done to stem the number of companies leaving the UK market, especially those leaving for foreign exchanges. Some see this process as inevitable, with George Hiscox predicting that “we could end up with London and other national exchanges being subsumed by New York, in the way that the regional exchanges in Manchester and elsewhere were eventually merged with London”.

Others are more optimistic. Richard Stone, chief executive of the Association of Investment Companies, praised the recent Mansion House speech by chancellor Rachel Reeves and thinks that it shows the government “clearly realises that, in order to deliver the government’s growth ambitions, you have got to encourage both individuals and institutions to invest more of their capital in the UK”. Crucially, the government also realises that such investment will have to involve people “putting money into public, rather than just private, markets”. With the new government “having spent much of the last 12 months listening to concerns that London has become unattractive as a destination for companies to list in, it is now starting to act”.

Not everyone thinks that the measures outlined by Reeves, which involved promises of “targeted support” to encourage savers to put more of their money into shares, go far enough. Chris Beauchamp of IG Index, which has launched a “Save our Stock Market” campaign, wants to see the government bring in a raft of extra measures. These include “increasing the pressure on pension funds to invest more in UK shares and an overhaul of the governance code to make it easier to offer the sort of salaries that can attract high-performance CEOs”. He also wants the government to think about cutting, or even abolishing, the 0.5% stamp duty tax on buying shares, “which is hobbling the stock market and making it much less attractive”.

Realistically, a cash-strapped government “will always want to spend money on the NHS, rather than tax breaks for investors”, say Godber and Hamilton. They also acknowledge that the idea of pushing (or even compelling) investors to buy more UK shares may be controversial, as shown by the last-minute decision to drop the closing of cash ISAs amid lobbying. However, over the next few years it is “inevitable” that the government will be forced to take more aggressive measures to push investors into shares.

This is partly because “we are pretty much the only major economy that doesn’t require pension funds to have a minimum allocation to domestic shares”. What’s more, if we don’t act, more companies will move their listing and domicile to the United States, which will reduce the billions that the government gets in corporate taxes, “blowing a hole in public finances”. Of course, when the government does start to bring in these measures, they are likely to act as a “magic bullet”, boosting valuations almost overnight.

The best investments to buy now

The most straightforward way to invest in the UK market is through an index fund, such as the SPDR FTSE UK All-Share UCITS ETF Acc (LSE: FTAL) or the SPDR FTSE UK All-Share UCITS ETF Dist (LSE: FTAD). As the names suggest, these aim to track the FTSE All-Share index and their five largest holdings are drug company AstraZeneca, bank HSBC, energy company Shell, consumer-products firm Unilever and the information and analytics company Relx. Both funds have a total expense ratio of 0.2%. The only difference between them is that the accumulation (Acc) fund reinvests the dividends, while the distribution (Dist) one pays them out. At the moment, the index has a yield of 3.5%.

A more active alternative is the City of London Investment Trust (LSE: CTY). This fund, which has been managed by veteran manager Job Curtis since 1991, primarily focuses on blue-chip companies, with an emphasis on ones with a good dividend, strong balance sheets and an attractive valuation (while aiming to avoid “value traps”). This conservative approach has been vindicated by four decades of dividend increases and by the fact that it has outperformed the market, both in the long run and over the last year. The ongoing charge is a relatively modest 0.35% a year.

A riskier alternative is the River UK Micro Cap Red (LSE: RMMC). Run by George Ensor, the fund focuses on listed UK companies with a market capitalisation of less than £100 million at the time of purchase. There are currently 33 holdings, with some of the largest including specialist lender Distribution Finance Capital Holdings, chain manufacturer Renold and consumer-goods company Supreme. Not only has the fund outperformed other UK-focused small-cap funds over the last year, but it also trades at a very attractive discount of nearly 20% to the net value of the shares in its portfolio, with an ongoing charge of 1.29%.

George Ensor believes that the UK market is particularly strong when it comes to fintech and is very bullish on Boku (Aim: BOKU). Boku helps the big US-listed technology companies, including Apple, Spotify and Meta, aggregate local payments providers, so the big merchants “only have to integrate once to Boku, rather than thousands of different payment networks”. This niche has enabled the firm essentially to double revenue since 2019, with earnings per share going up eightfold over the same period, more than justifying the fact that the stock trades at 29 times 2026 earnings.

Until recently, the UK energy sector has suffered from political uncertainty. Moving forward, its prospects are much brighter. One company that looks attractive is SSE (LSE: SSE). EcoFin’s Jean-Hughes De Lamaze notes that, despite its “well-diversified portfolio, clean power generation, good networks and strong earnings growth” it is one of the cheapest names in the utility sector in Europe and the world. The shares trade at less than ten times 2026 earnings and yield 3.8%.

Engineering company IMI (LSE: IMI) is also worth considering. It makes high-quality valves and industrial automation equipment. Sarasin’s Tom Wildgoose thinks IMI epitomises the extent to which UK firms are undervalued. Despite being a “great company doing great things, with steady sales growth and a good return on equity”, its shares trades at a much lower multiple of earnings, of around 16 times 2025 earnings, compared with similar US companies.

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FRP Advisory Group (Aim: FRP) is a leading advisory company specialising in restructuring and insolvency services across the UK, with a market share of 12%. Over the past decade, it has expanded and doubled down on its position, increasing its share of the market threefold from 4% at the beginning of the 2010s. The firm has grown despite a relatively benign backdrop for insolvencies and restructurings. According to the Insolvency Service, the number of corporate insolvencies reached a high of 24,000 in 2009 (across England and Wales) before declining to 14,500 a year in 2015, 2016 and 2017, before rising slightly to 17,000 in 2019 and then falling again to a multi-decade low of 12,300 in 2020.

In the years between 2009 and 2019, struggling businesses were supported by low interest rates and modest economic growth, but all that changed in 2022. Government-backed schemes to support businesses helped stave off a complete collapse in activity during the pandemic. But as the schemes were withdrawn and interest rates rose, the number of firms falling into distress also climbed. From a low of 12,631, the number of insolvencies in England and Wales more than doubled to 25,164 in 2023.

FRP Advisory Group's expansion plans

FRP entered this environment in a position of strength. The company floated on the Aim junior market in March 2020, raising £20 million by placing new shares to boost its balance sheet and fund acquisitions. Since then, it has splurged on deals, with 14 completed from the time of the IPO to May 2025 and five deals completed in its 2025 financial year alone.

These deals have helped FRP expand beyond its traditional markets. For example, in May, it acquired One Advisory Group, which provides financial reporting and transaction advice, and governance services to more than 100 clients, the majority of which are listed on the London Stock Exchange. All these deals were funded with the company’s plentiful cash resources. Net cash was £33 million at the end of fiscal 2025, a little under 10% of the company’s market capitalisation.

According to Berenberg, which has analysed the company’s M&A-driven revenue expansion, these deals accounted for around half of revenue growth (20.5%) in 2022. Still, in fiscal 2023 and 2024, M&A growth was almost entirely non-existent compared with organic growth of 9.3% and 23.3% respectively. In fiscal 2025, deals accounted for about 40% of the company’s 18.7% top-line revenue growth.

Deals have been core to the company’s growth proposition, but so has the operating environment. Revenue has grown at a compound annual growth rate of 15% over the past decade, says Berenberg, as the number of corporate insolvencies rose significantly. The trend is continuing. The latest figures from the Insolvency Service suggest the number of registered company insolvencies in England and Wales rose 8% month-on-month in May 2025 and 15% year-on-year. Monthly insolvency numbers in the first five months of 2025 were higher than in 2024 and at a similar level to 2023, which saw a 30-year high in the annual number of insolvencies.

FRP Advisory Group's corporate finance arm

FRP has diversified from its core business of restructuring (although that still accounts for 70% to 80% of group revenue). Not all businesses that run into difficulties end up collapsing. Some are acquired, and some manage to agree a deal with creditors. Even here, FRP’s corporate finance business (15% to 20% of revenue) has a strong foothold in the market. It was the 19th-most-active M&A adviser in the year, being involved in 76 successful deals, averaging £20 million in deal value. This suggests FRP is firmly established in that mid-market bracket of firms that form the backbone of the UK economy.

Berenberg has pencilled in pre-deal revenue growth of 7.7% in 2026, 4% in 2027 and 4% in 2028. Earnings are expected to grow at a much faster clip. Thanks to its successful integrations, the company has sector-leading margins, with a 27% earnings before interest, tax, depreciation and amortisation (Ebitda) margin, exceeding its peer group average of 24%. As such, analysts have pencilled in Ebitda growth of 8.9% in 2026 on a margin of 27.5%. Return on capital employed (Roce), a measure of profit for every pound invested, is expected to be 34.9% on a forward basis.

Undervalued growth

These are all very impressive figures, but despite FRP’s growth, profitability and strong balance sheet, the market doesn’t seem to be interested. The stock is trading at a forward price/earnings (p/e) ratio of just 10.2, falling to 9.8 based on 2027 estimates. It also offers a forward dividend yield of 4.6%. Strip out cash, which is expected to hit £39 million at the end of 2026 (assuming the firm does not find any further deals), and the p/e falls to around nine times on a forward basis.

Based on these numbers and compared to the peer group average, Berenberg believes the stock is deeply undervalued. They’ve pencilled in a price target of 220p per share, suggesting a potential upside of around 72% from current levels, excluding the dividend yield on offer. Some caution is warranted, as restructuring is an inherently cyclical business. If interest rates fall and the government decides to take more action to stimulate business in the UK, the number of restructuring and insolvency deals will almost certainly fall. Still, FRP’s management team has demonstrated over the past five years that the company has what it takes to manage the cycle and even grow during tough periods.

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London’s Aim small-cap market is down 40% since mid 2021, but within that there has been a wide disparity of outcomes. Many 2021-vintage initial public offerings (IPOs) are down 80% or more. Yet one Aim-listed stock looks to have achieved escape velocity, having rocketed 28-fold since May 2021.

Interestingly, Filtronic (Aim: FTC) is not a start-up or even a recent IPO. The company’s history goes back to the 1970s, when it specialised in components for the defence industry before quickly adapting to benefit from the 1980s boom in mobile phones. The shares have been listed since the mid 1990s, but were demoted from the main market to Aim in 2015, following a difficult decade when the telecoms, media and technology bubble burst. Between 2000 and 2015 the shares fell from £7 to just 5p, a decline of more than 99%.

New opportunities for Filtronic

Filtronic’s products are a mix of transceivers, amplifiers and duplexers – components used to send and receive communication signals. It has three design sites in the north of England (Manchester, Leeds and Sedgefield), and an assembly and testing centre in the US. Last year, the firm was awarded the King’s Award for Enterprise in Innovation for its monolithic microwave integrated circuit, which is deployed across the world in 5G networks. The group’s equipment is also used in high-altitude platform systems (HAPS) for controlling drones and airships, though this is not a material driver of revenue.

However, rather than terrestrial telecoms, space is a huge opportunity for shareholders today, according to Richard Staveley of the Rockwood Strategic investment trust, who bought into the company in May 2023 at around 12p per share.

Filtronic has been winning contracts to supply components for ground stations and is hoping to win new satellite customers as well as developing products for the satellites themselves. The company had net cash of roughly £12 million at the end of May, and he believes, a potentially very bright future as existing clients grow and the business achieves scale.

Filtronic contract wins

A series of key contract wins in recent years have sent sales soaring. In early 2023, management began to announce contracts with an unnamed leading global provider of low-earth orbit (LEO) satellites. LEO satellites (at an altitude of 1,200km) have significantly lower latency of 25ms-50ms for signals – 10 to 20 times faster than traditional geostationary satellites that sit at 36,000km.

They can use less-congested frequency bands that are otherwise unavailable to more distant geostationary satellites. Launches to LEO also require less fuel and smaller rockets compared with higher orbits, meaning they are more affordable and can be used more often. Unlike geostationary satellites, LEO satellites operate as constellations – large networks of hundreds of individual satellites orbiting the Earth in less than two hours, many times a day.

In September 2023, Filtronic also won a £3 million order with the European Space Agency. In April 2024, it won a £16 million contract and five year-partnership with Starlink. Revenues more than doubled to £56 million in the financial year ending May 2025, compared with the previous year.

In June, it announced its largest contract to date, with an order from SpaceX worth $32.5 million, which will be fulfilled in the year ending May 2026. Momentum has continued, with a £13 million order in the aerospace and defence sector announced in mid-July.

Filtronic shares attract attention

Under the strategic agreement with SpaceX, Filtronic issued warrants to allow SpaceX to buy up to 10% of its share capital once $60 million of orders had been placed by SpaceX. It’s unclear whether SpaceX will hold the shares or sell for an immediate profit, but the US company has not disclosed a stake, which suggests it has opted for the latter.

However, one US asset manager – Driehaus Capital – has announced a disclosable stake just above 3%. Even as UK active fund managers continued to suffer outflows, Aim success stories are attracting attention from overseas investors.

Filtronic’s shares are now trading on seven times May 2025 sales. This is not cheap, but it is far from the stratospheric valuations seen in unlisted space shares. SpaceX is conducting a funding round that reportedly values it at roughly $400 billion, which suggests a valuation of just under 30 times sales.

Filtronic is on a price/ earnings ratio of 55 times forecasts for the year ending May 2026, and a forecast enterprise value/Ebitda (earnings before interest, taxes, depreciation and amortisation) ratio of 21. Investors clearly expect significantly more growth to come. That may be right – management suggested at the first-half results that seven tonnes of satellites are expected to be launched every day over the next 10 years.

Still, there are risks. The top three customers accounted for 84% of revenue last year. Orders are likely to be lumpy. Cavendish – Filtronic’s house broker – is yet to publish forecasts for the year ending May 2027. Given the share-price performance, it’s possible that investors’ expectations have run ahead of themselves. So far though, Nat Edington, the chief executive who was appointed in May last year, has been able to execute. In any case, it’s refreshing to celebrate an Aim company on a rising trajectory, in a sector that looks like it will enjoy a stellar future.

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Global financial markets have undergone a seismic change in the last 30 years. The number of public companies has slumped from a peak of 7,300 in 1996 to 4,300 today. Companies are delisting and initial public offerings (IPOs) have slowed to a crawl, with many firms choosing to stay private for longer, or never list at all. This shift has left public equity investors with a narrower market. Most growth stories are off-exchange: of the 159,000 companies making annual sales of $100 million or more, 140,000 are privately owned.

To gain exposure to this vast swathe of private companies, investors need to turn to private-equity funds. These funds, which have been around for decades, raise capital to buy companies with the aim of growing the business and eventually selling it at a profit. In the 25 years from 1999-2024, annualised returns on private-equity funds surpassed those of global listed equity funds by 7.3% a year.

But until recently, private-equity funds have been the preserve of ultra-high-net-worth individuals and institutional investors, such as pension funds or sovereign wealth funds. This is due to high investment minimums (typically millions of dollars) and complex regulatory frameworks. Investors are also obliged to lock up their capital for periods of 10 years or more.

However, this is finally changing. Many top alternative-asset managers are creating versions of their flagship funds for private investors: semi-liquid or evergreen funds. These are structured like unit trusts, albeit with a few more restrictions. Capital can be invested at regular intervals, and there are periodic liquidity windows (usually once a quarter). The minimum investment can be around £25,000.

Three ways to access private markets

EQT Nexus gives investors exposure to a private-market portfolio with an emphasis on private equity and infrastructure. The fund is managed by EQT, the world’s second-largest private-equity firm, whose history is rooted in the Wallenberg family, the Swedish industrial dynasty and one of the most influential business families in Europe.

In keeping with Wallenberg family tradition, EQT invests in good businesses, helping them develop into great and sustainable companies. Since June 2023, the fund has grown net assets to €1.1 billion and delivered a return of 20.2% in sterling. The fund is hoping for a yearly return of 12%-15% net of fees over the long term. The minimum investment is £26,000.

The Franklin Lexington PE Secondaries Fund focuses on “secondaries”: it acquires private-equity investments from other market participants, usually at a discount, some years after the original investment. By this stage, the portfolio is less risky. Lexington is an expert secondaries manager with a solid record. It has been active in this market since its inception over 30 years ago and has $40 billion invested in the asset class. Since 1990, secondaries managed by Lexington have delivered an average internal rate of return (IRR) of 16.0%. The minimum investment is £26,000.

Oaktree Capital Management is a global specialist credit investor, led by renowned investors Howard Marks and Bruce Karsh. The Oaktree Strategic Credit Fund offers exposure to private direct lending and opportunistic credit, two of Oaktree’s main areas of expertise. The firm’s focus on downside risk is born out of its experience in distressed credit: default and recovery rates across its $45 billion of private direct loans have historically fared better than its peers’ rates, while still delivering the higher yields associated with private credit. The fund targets a net distribution yield of 8%-10%, and a net levered return of 9%-11%. Investors can invest in the founder share class in sterling, with a discount on the annual management charge, reduced to 1.8% from 2.1%. The minimum investment is £51,000.

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UK equities are having their time in the sun. The FTSE 100 recently hit an all-time high of 9,000, driven by a broad recovery in equity prices. To put it another way, the rally wasn’t just driven by a handful of outperformers. In fact, during the first half of the year, UK equities have done better than their US peers, reversing a decade-long trend of US outperformance. Since the start of 2025, the FTSE All-Share has delivered a total return of just over 9% in local currency terms. In US dollar terms, it produced a total return of 19%, significantly outperforming the S&P 500’s 6%.

According to numbers compiled by the wealth-management giant Schroders, the outperformance has been driven not by earnings growth, but by multiple expansion – a side effect of investors’ confidence improving. Over the first half, Schroders calculated the UK’s total return was driven by a 10% increase in valuation and a 2% return from dividends. Earnings, on the other hand, proved to be a headwind, taking 3% off returns as analysts pushed growth projections lower due to global uncertainty (mainly over tariffs).

UK equities: a growth story

Sentiment counts for a lot in markets and in the UK that has improved dramatically (albeit from a very low base) over the past six to 12 months. It might not seem like it, but the UK has experienced the strongest run of positive economic surprises among developed markets since January. According to Citi’s Economic Surprise Index (once again, from a very low base), sentiment around the UK’s trade-deal “hat trick” with the US, India and the EU seemed to reignite investors’ sentiment about growth. There’s also the tailwind of interest rates. Markets are pricing in several rate cuts by the Bank of England over the remainder of the year and into 2026. Lower rates should support domestic cyclical stocks such as retailers, housebuilders and builders’ merchants. These rate-sensitive sectors should also benefit as Labour’s efforts to drive investment in infrastructure and planning reforms start to yield results.

Despite the market’s strong performance so far this year, investors, particularly those in the UK, are still leaving in droves. According to equity fund flow data compiled by JPMorgan, over the last 12 months, around £32 billion has flowed out of UK equity funds, equivalent to 11.6% of starting assets under management. Investors seem to be selling into the rally, with outflows accelerating over the past few months despite recent market highs.

It might come as a surprise, but on a top-down basis, UK equities are a growth story. Estimates from JPMorgan have earnings per share in the FTSE 100 growing by 11.5% in 2025, before falling back to 2.5% in 2026. Schroder’s Intelligence, on the other hand, has earnings per share growing 3% this year and then 12% in 2026. Whichever way you look at it, that’s projected earnings growth in the mid-teens over the next two years. Based on that, the FTSE 100 is trading at an average forward price-earnings (p/e) ratio of 12. “This represents a 10%-15% discount to their 15-year medians and a substantial discount compared with the US market,” according to JPMorgan.

Dig deeper, and the valuation is even more compelling. “UK mid-caps trade at 12 times expected 2025 earnings, with earnings forecast to grow at around 15% year-on-year, indicating potential good value (a p/e ratio less than the growth rate). There’s potential for a re-rating if domestic growth persists,” the investment bank adds.

UK equities: key risks to avoid

There are compelling reasons to buy UK equities, but there are also plenty of risks to consider. JPMorgan makes it clear that domestic stocks are favoured over international exporters. Over the past four years, industrial energy prices in the UK have risen to the highest levels in the developed world, making it difficult for most producers to compete with their international counterparts. A significant portion of the UK’s industrial base has vanished as a result. It doesn’t look like this environment is going to change anytime soon.

Utilities also look risky due to political interference, high capital spending requirements and generally poor return profiles. Indebted consumer stocks, which will suffer if wage growth stagnates, should also be avoided. The major lingering risk for UK equities is the potential for further tax rises. The Labour government has been floating numerous potential tax hikes in the autumn Budget. With the country’s finances deteriorating and a complete lack of political will to cut spending, additional taxes are almost guaranteed. Additional taxes will have an impact on consumer spending and business activity. Based on the last round of tax hikes, which dented business confidence and squeezed hiring, investors do need to consider this risk on the horizon.

The valuation of UK equities compared with international peers has already led to a wave of takeover offers. As UK investors flee, international investors are seizing the opportunity to swoop in. The value is there, and private equity is capitalising on it. Real estate investment trusts (Reits) have become a particular area of interest. Assura, Urban Logistics, Care Reit and Warehouse Reit have all been acquired this year. Due to an interesting quirk in the law regarding stamp duty, it is often cheaper to purchase property through a company structure than to buy it directly. Shares attract stamp duty at a rate of only 0.5%, while corporate bodies buying certain types of property may face stamp-duty rates in the mid-teens. So, acquirers receive a tax benefit, as well as the opportunity to purchase property at a discount to its market rate. At the beginning of June, there had been more than 30 bids for companies worth more than £100 million, with an average premium of 45% across all sectors.

Aside from the real-estate sector, high-quality UK mid caps and small caps look attractive, trading at historically wide discounts to their US peers and with international revenue footprints. Banks offer dividend yields in the mid single digits with further capital returns likely as profits continue to grow and are still trading at relatively low valuations despite their shares rising to levels not seen since before the financial crisis.

UK equities: go for quality

So where should investors be looking for value? As ever, quality is key. A fascinating study on this topic emerged at the beginning of July in the form of a Panmure Liberum report, “Accounting red flags: high-quality stocks lead”. The research, building on academic studies and machine-learning applications, aims to help investors identify high-quality stocks, avoid corporate failures and enhance returns. The framework focuses on three main areas: accounting quality, audit risk and governance oversight. Companies were categorised into the top 30% (highest accounting quality) and the bottom 30% (lowest accounting quality) baskets (excluding financial and real estate companies due to issues arising from leverage). Over the past five years (ending June 2025), the report found that the top 30% quality basket in the UK outperformed the bottom 30% by an annualised 9%.

After analysing the data on reports from 2024, the analysts compiled a select list of UK equities that they believed met all the criteria they were looking for in terms of companies with the best-quality accounts. The list includes the likes of Associated British Foods, BT Group, DCC, Games Workshop Group, Halma, Mitchells & Butlers, National Grid, J. Sainsbury, SSE, Taylor Wimpey and Whitbread.

UK equities: promising healthcare champions

Panmure Liberum has also dived into the healthcare sector in the UK. Healthcare, biotechnology and pharmaceuticals are all areas of strength in the UK economy. They are among the most significant growth sectors globally, given the ageing population, advancements in medical technology and increasing wealth. Advanced Medical Solutions (LSE: AMS) sits in the sweet spot of UK value and is one of Panmure Liberum’s favourite plays. The company has a portfolio of “medtech” products, mostly developed in-house, focused on the surgical and wound-care markets. It was a small-cap champion and returned more than 1,000% between 2010 and mid-2018. However, the business struggled to grow into its valuation, and the stock is down around 30% over the past five years. Still, Panmure thinks this is the “best rerating story” in the medtech sector and looks “most obviously oversold” when compared with historic ratings. The company has made several strategic missteps over the past five years, which have hindered growth in the US market. Difficulty digesting a recent acquisition has also spooked investors. But while the market struggles to understand the business, private equity is waiting in the wings. A recent approach from Montagu didn’t generate an offer, but it put the company on investors’ radars. Panmure believes a fair price for the company is between 300p and 350p.

The investment bank also thinks animal genetics company Genus (LSE: GNS) is deeply undervalued. The company specialises in using cutting-edge science and technology, including genomics selection and gene editing, to enhance animal breeding. For example, in April, Genus received US regulatory approval for its product designed to provide pigs with resistance to porcine reproductive and respiratory syndrome (PRRS), a disease affecting farmers worldwide. This was a “hugely significant landmark” and is expected to lead to approvals in other jurisdictions. This treatment alone could be worth more than 1,000p per share, but much of the growth isn’t yet reflected in the company’s share price.

A wild card is CVS Group (LSE: CVSG). Investors dumped shares in the group, which owns veterinary practices across the country, when the UK regulator announced an investigation into market and pricing practices in May 2024. As investors have reevaluated their position, the stock has recovered and Panmure sees further upside. It notes that the regulator’s working paper on remedies was “relatively benign”. Initial findings are expected in September 2025, and final recommendations before January/February 2026. If the outcome of the investigation comes out as expected, analysts believe the stock could be worth around 1,600p based on historic profit multiples.

UK equities: mid caps

Berenberg has also highlighted some of the most attractive names in the UK mid-cap sector based on their growth potential. Genus is on their list, as well as electronics retailer Currys (LSE: CURY). At the beginning of the month, the company reported a 37% increase in adjusted profit before tax, along with the return of cash dividends, as the group’s cash balance rose to £180 million net at the end of the year. However, the stock is trading at a forward p/e below ten, which does not seem to consider the company’s growth potential. OSB Group (LSE: OSB) and Paragon Banking (LSE: PAG), two specialist mid-cap lenders, are also on the investment bank’s list of undervalued growth plays. The former is trading on a p/e of 4.8, while the latter is on 7.1 times forward earnings. Both have carved out a niche in the buy-to-let lending market, which, despite negative headlines, is still growing. Paragon recorded a 25% rise in new buy-to-let lending in the first half of its financial year, driven by growing demand from landlords, the firm announced at the beginning of June. OSB has had to deal with internal issues as well over the past few years, but these now seem to be behind the business. A series of updates providing evidence that the firm is delivering in the short-term will “help restore confidence”, noted Panmure in a recent note.

Other mid caps on Berenberg’s radar, all trading on a p/e of ten or less, include Kier Group (LSE: KIE), ITV (LSE: ITV), Mitie (LSE: MTO), Pets at Home (LSE: PETS) and IG Group (LSE: IGG). Kier and Mitie, in particular, are plays on the UK government’s ballooning spending bill; ITV is more of a break-up/ takeover play. IG, with its firm and growing foothold in global financial markets, is a true UK-based global champion, with a substantial growth runway ahead. One company that features on a lot of “best-buy” lists issued by the City’s top brokers is Babcock International (LSE: BAB). The defence firm is one of the major contractors for the UK’s nuclear deterrent, and the shares have more than doubled in value over the past year as the Labour government has reiterated its commitment to defence spending in the UK. The shares started the year at a discounted multiple of just 10.4 times forward earnings. Now, they’re closer to 20 times, which is a bit on the pricey side. That said, defence is a long-run, predictable business, suggesting Babcock deserves a premium valuation. JPMorgan has earnings growing 64% in 2025 and then 8% in 2026, with a 4.2% dividend yield.

Barclays’ favourite mid-cap is 4imprint Group (LSE: FOUR). The firm, which produces promotional products, is one of the investment bank’s top picks in Europe, with a potential upside of 68% to the 5,500p price target and a Barclays “quality” rating of 99%. The quality of the business is determined by its strong net cash balance (£148 million at the end of 2024), free cash flow (£103 million estimated for 2025) and return on capital employed of 77.7% in 2024. Despite these metrics, the stock is trading at an undemanding forward p/e of 12.7, with a prospective dividend yield of 5.1%.

UK equities: the best of the best

There are plenty of London-listed mid caps that look attractive at current valuations, but which ones really deserve a place in your portfolio? 4imprint seems to be one of the City’s top picks. Barclays has it as one of its top plays in Europe, and it’s one of a handful of businesses with net cash on the balance sheet. Berenberg thinks “4imprint’s highly cash-generative model and low appetite” for mergers and acquisitions suggests there is “scope for increased returns to shareholders through special dividends or buybacks”. It also thinks there’s plenty of scope for the group to expand its profit margins through economies of scale and general growth.

Genus is another firm that is universally backed by the City.

Deutsche Bank, Berenberg and Panmure have all flagged the stock as a “buy” following its winning US regulatory approval and due to rising demand for animal proteins. Babcock also has a strong following. It’s those long contract lead times that are really exciting. Berenberg puts it nicely: “Revenue guidance strikes us as conservative given the large pipeline of domestic and international defence contract opportunities, as well as the strong momentum as evidenced by the 11% average annual organic revenue growth achieved in the last three years”.

In the property sector, NewRiver REIT (LSE: NRR) has been flagged as an undervalued recovery play. As an owner of retail parks and shopping centres, NewRiver has faced a challenging few years, but the outlook is now starting to improve. “With rents still affordable and asset values near cyclical lows,” NewRiver’s portfolio is well placed to benefit from the normalisation in investors’ sentiment “and the hunt for high, stable income”, Panmure Liberum’s property team notes. The 9.1% dividend yield is fully covered and the company is trading at a 36% discount to the value of its net assets – appealing as bidders circle the sector.

Finally, there’s Mr Kipling owner Premier Food (LSE: PFD). This company has risen, like a phoenix from the ashes, over the past five years. Coming out of the pandemic, the group was overleveraged, burdened by onerous pension obligations and struggling to control a bloated cost base. It soon got costs under control, but debt and pensions remained an issue. In the past three years, it’s been able to draw a line under the pension issues and make a dent in the debt. It’s used the cash to reinvest in the business, reinstate the dividend, and is now looking for acquisition deals. After a strong few years, analysts weren’t expecting much in the way of excitement this year. They were wrong. A recent trading update beat low expectations and management reaffirmed profit expectations for the year. Growth will be driven by progress in new products and recent acquisitions. Both Shore Capital and Berenberg analysts tip the stock. It trades on a forward p/e of 13, compared with the peer group average of 17.

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When I began contributing to MoneyWeek two decades ago, Britain was in the middle of a property mania. Flipping houses was the path to rapid riches. TV shows were full of people renovating flats to sell – often spending more than they earned back. Financial-advice columns were stuffed with those who wanted to gear up their buy-to-let portfolio to buy more, or had already borrowed too much and were panicking.

Today, Britain is still obsessed with property, but the mood is very different. It’s not simply that investing in property is less appealing due to tax changes and new laws. There has finally been some long-overdue realisation that expensive housing is a curse that holds back the economy, not a source of good fortune.

Still, I am not as confident as Matthew Lynn that property prices are going to plummet to reasonable valuations. Houses are not like most assets: many people buy once they can afford to because they are tired of renting sub-standard properties or because they want to be certain of housing costs for later in life – even if they think prices are expensive. Unless interest rates soar (which seems unlikely) or supply vastly increases – and the government doesn’t have the appetite to provide the state backing needed – a crash is less probable than a long stagnation.

Housing market stagnation

In fact, quiet stagnation is what we have been seeing for a while. For this, refer to the Land Registry data: it is much less timely than other indices (sales can take a very long time to be added) and so doesn’t show turning points well, but it provides the most comprehensive view of long-term trends.

These series show that house prices have risen strongly in nominal terms since the global financial crisis. Yet adjust for inflation and it’s a different story – real house prices are now below where they were in 2007. Of course, housing is not one market; property type and location are critical. Look at London and we see stagnation since 2016 but also a gulf opening up between terraced houses and flats. Still, even flats are only back to 2007 levels in real terms, when they were already unprecedentedly expensive relative to incomes. Britain’s financial centre has a stagnant yet still-overpriced housing market and a shrinking yet arguably undervalued stock market. No wonder the mood is so bleak.

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In June, Spectris, the high-tech precision measurement firm, was bid for by private-equity giant Advent International, which prompted a bidding war. In a year marked by a large number of takeovers, this one stands out. It was bought because it is a high-quality global leader that was too cheap. This is more than just another deal – it’s a profound warning for investors in Britain’s most respected companies.

For more than a decade following the 2008 financial crisis, a select group of top UK firms, including Spectris, were the darlings of the stock market. Their reliable profits and steady growth, in an era of rock-bottom interest rates, led investors to push their valuations to unsustainable heights. Since their peaks in 2021, however, this narrative has changed. Many of these once-admired firms, from industrial engineers to specialist food-ingredient makers, have seen their share prices plummet, some by more than 50%.

This dramatic shift was triggered by a fundamental change in the economic environment, with a surge in inflation and aggressively rising interest rates that provided attractive alternatives to equities. While this “repricing” was a necessary correction, the Spectris takeover highlights a new risk that these quality businesses have become not just cheap, but too cheap, making them irresistible targets for private capital.

A company’s value is derived from its expected future profits, discounted to their present worth. When interest rates were near zero, distant earnings were barely discounted, making them immensely valuable. As rates rose, the discount rate increased, drastically reducing the present value of those long-term earnings. This mechanism, combined with broader market anxieties, swiftly deflated valuations.

The very attributes that once justified sky-high prices – that is, their predictable, long-duration earnings – became liabilities when a guaranteed 5% could be earned from a government bond. The rush for the exits began, raising the question: do these fallen stars now offer a compelling opportunity for long-term investors? Or, as the Spectris deal shows, does their undervaluation invite opportunistic private buyers to take them off the public market for good, starving investors of the opportunity?

Quality stocks take a battering

The valuation crunch, when it came, was swift and brutal, with the share prices of some firms tumbling from their giddy late-2021 peaks. No company illustrates this reversal of fortune better than Spirax (LSE: SPX). For years, it has been regarded as one of the most consistent world leaders on the UK stock market, prized for its relentless growth and resilience. The source of this reputation is its critical role across an incredibly broad scope of industries; its specialist steam systems are indispensable for everything from food production and pharmaceuticals to the operation of hospitals, chemical plants and oil rigs. This diversification has made it a fortress of stability.

Yet even this industrial titan was not immune to the changing economic tide. Its shares plummeted from an all-time high of more than £172 in November 2021 to roughly £60 today, a shocking fall of more than 60%. This collapse was a clear case of valuation reset, not just a price decline. The company’s forward price-to-earnings (p/e) ratio was slashed from an eye-watering 50-times earnings to a far more sober 20. After such a dramatic de-rating, a world-class business that was once prohibitively expensive is now beginning to look like genuinely good value. This has brought the company firmly back on the radar, and for investors with a long-term view it is precisely the kind of name that now warrants serious consideration.

It was a similar story at fellow FTSE-100 constituent Halma (LSE: HLMA), a group of businesses focused on safety, health and environmental technologies. Its shares fell by nearly 40% from a peak of around £32. But unlike Spirax, the shares have regained their lustre in recent months, hitting new highs and showing that, when the market recognises the underlying value of these quality businesses, significant returns can be made. Halma represents what can happen to businesses whose qualities are clear, but the punishment was more severe for smaller companies that had captured and lost the imagination of investors. Treatt (LSE: TET), the flavour ingredients maker, which had enjoyed a truly spectacular run, saw its share price collapse by more than 80% from its peak of more than £13 in late 2021.

This was not just a case of a few isolated firms hitting trouble. It was a sector-wide, thematic collapse. The very mechanism of highly geared valuation expansion that had amplified gains on the way up went into a violent reverse. For years, investors had been rewarded for paying ever-higher prices for reliable earnings. Now, they were being punished severely for it. The tide of cheap money had gone out, and many investors who had piled in near the top were left painfully exposed.

It's about more than just interest rates

While rising interest rates were the primary catalyst for this dramatic derating, it would be a mistake to view this story through a purely macroeconomic lens. As the financial environment tightened, company-specific operational issues, previously glossed over by a buoyant market, were thrown into sharp relief. For several of these firms, the post-pandemic world brought a host of challenges that hit both sales and profit margins.

For Suffolk-based Treatt, it was a perfect storm. The price of orange oil, a key raw material, soared because of poor harvests and disease in Florida and Brazil. Simultaneously, squeezed consumers in North America began to cut back on premium beverages, a key end-market for Treatt’s natural extracts. This toxic combination of cost inflation and slowing demand led to a string of profit warnings that shattered its growth narrative and hammered its share price. Treatt now looks more like a speculative opportunity due to its small size and specific challenges, but at the current valuation could present an interesting long-term proposition for those comfortable with risk.

It wasn’t alone in facing headwinds. Victrex (LSE: VCT), a world leader in high-performance polymers used in everything from aeroplanes to spinal implants, also faltered. Its growth was hampered by a sluggish recovery in elective surgeries post-pandemic that affected its lucrative medical division. The company also faced early teething problems at its new factory in China, prompting concerns over operational issues. Once open, production also ramped up more slowly than expected, piling further pressure on profits.

Even the larger, more diversified players were not immune to this punishing environment. Renishaw (LSE: RSW), the master of precision measurement, found its fortunes tied to the cyclical spending of its customers in the electronics and semiconductor industries. As demand for smartphones and other gadgets cooled, so too did orders for Renishaw’s equipment. In recent months, the share price has declined considerably following the death of its co-founder, David McMurtry. His significant stake, combined with that of his co-founder John Deer, has created uncertainty over the long-term ownership structure. The market is wary of a potential future sale of these holdings, creating a stock “overhang” that can suppress the price regardless of the firm’s operational performance. Even the resilient Rotork (LSE: ROR), a dominant force in industrial valve actuators (devices that control the flow of liquids and gases), faced margin pressure from cost inflation and supply-chain disruptions, even as its order book remained healthy.

For Tristel (LSE: TSTL), the challenge was different and resulted in prolonged frustration for investors despite the firm’s clear strengths. This is a great British business: a leader in high-level hospital disinfectants, built on its proprietary chlorine dioxide chemistry. Its products serve a critical, non-discretionary role in infection prevention, a constant need in healthcare. For years, its quality and steady growth in core markets were never in doubt. But the valuation became overly reliant on the promise of securing US regulatory approval. When that FDA process dragged on longer than expected, even loyal shareholders grew weary. As deadlines slipped, sentiment soured and the shares stagnated, becoming divorced from the company’s solid fundamentals.

That dynamic has now shifted. Tristel finally secured FDA approval in 2024, unlocking access to the world’s largest and most profitable healthcare market. This is not incremental – in fact, it could be transformational.

Years of investment in research and development and regulatory work may now deliver a step change in growth as US expansion begins. Tristel is on the cusp of evolving from a respected UK specialist into a global force in infection prevention. The shares look attractive.

Are these quality stocks a bargain?

After three years of pain, the crucial question is whether these fallen stars represent a compelling opportunity. With valuations significantly compressed, are these high-quality businesses now available at a fair price? The investment case rests on balancing the enduring strengths of these companies against the risks of a permanently changed economic environment.

Their core appeal has not vanished. They are, for the most part, still exceptional businesses. They command dominant positions in niche, global markets, protected by high barriers to entry, such as intellectual property, long-standing customer relationships and technical know-how. This allows them to generate high returns on capital employed (ROCE) and prodigious cash flow.

Spirax’s expertise in steam, a critical component in countless industrial processes, is unparalleled. Halma’s businesses address non-discretionary, regulation-driven needs in safety and environmental monitoring. These are not fads, they are structural growth markets. Many are also plugged into unstoppable long-term trends. Whether it’s the drive for greater energy efficiency (a core market for Spirax and Rotork) or the inexorable rise of factory automation (a driver for Renishaw), these firms are on the right side of structural change.

The resilience of their business models is a key attraction. For many, a significant portion of revenue is recurring, coming from essential servicing, software subscriptions, consumables and spare parts. This aftermarket income smooths out the lumps in more cyclical new equipment sales, a core reason they earned the “quality” moniker in the first place.

And their stocks are now much cheaper. A p/e of 20-25 for a world-leading industrial business is historically reasonable, a far cry from the 40-50 times earnings seen at the peak. This provides a margin of safety that simply did not exist in 2021. An investor today is paying a sensible price for the underlying earnings power of the business, rather than an exorbitant price for the promise of ever-expanding multiples. Furthermore, many of these firms are taking action. Treatt is implementing self-help measures to improve efficiency and manage costs. And for Tristel, securing FDA approval opens up a market that could potentially double its sales over the long term. This is a tangible catalyst that could put it back on its growth trajectory.

Investors will have to be patient

However, investors should not expect a swift return to the glory days. The macroeconomic landscape has fundamentally changed. Interest rates are unlikely to return to near-zero levels any time soon. This means the powerful tailwind of ever-lower discount rates is gone. Future returns will have to be driven almost entirely by genuine earnings growth, not by the market being willing to pay more for those earnings. There is also the risk that the growth rates of the past decade were an anomaly. Globalisation, particularly the rise of China, provided a huge boost to many of these industrial firms. With geopolitical tensions rising and China’s own growth slowing, that tailwind may have turned into a headwind. The operational issues at Victrex, linked to weaker demand from China, are a clear warning sign.

Furthermore, the previous assumption that they do not have much competition deserves fresh scrutiny. The combination of Covid-induced supply-chain disruption and the premium pricing commanded by these firms may have encouraged some customers to seek out “good enough” alternatives from competitors. Any permanent erosion of market share at the edges could cap future growth and pricing power. Finally, while valuations are lower, they are not yet in deep bargain territory. These are still rightly priced as premium businesses compared with the wider UK market. An investor buying today is betting that their quality will allow them to navigate a more challenging environment and resume a path of steady, if perhaps slower, growth.

What to look for in quality stocks

So, how should an investor approach this sector? The key is to be selective and focus on the fundamental metrics that define a truly high-quality business, rather than simply buying the narrative. First, scrutinise the balance sheet. In a higher interest-rate world, debt is dangerous. Favour firms with strong net cash positions or very low levels of leverage. This provides resilience and the firepower to invest in research and development, or make bolt-on acquisitions during a downturn.

Second, focus on the free cash-flow (FCF) yield. This metric (the annual free cash flow per share divided by the share price) is a far better valuation tool than a simple p/e ratio. It shows how much real cash the business is generating for its owners. A sustainable FCF yield of 4%-5% from a growing, high-quality business is an attractive proposition for a long-term investor.

Third, look for a proven ability to innovate and maintain pricing power. Companies that consistently invest a high percentage of their sales in research and development, such as Halma and Renishaw, are creating the products that will drive future growth. Their ability to pass on price increases without losing customers is a key sign of a strong competitive moat.

Finally, consider a basket approach. Rather than trying to pick the single best company, it may be more prudent to build a small portfolio of three to five of these businesses. This diversifies company-specific risk while still providing exposure to the broader theme of a recovery in quality stocks. To me, Renishaw, Rotork, Tristel and Spirax seem well worth a look.

Funds and investment trusts that focus on UK quality growth companies can also be a good option for those seeking a ready-made, diversified portfolio. Whichever path is chosen, patience will be paramount. The re-rating of these businesses will not happen overnight. Attempting to time the bottom perfectly is a fool’s errand; the focus should be on accumulating stakes in excellent firms at sensible, long-term prices.

A new chapter for quality stocks

The story of Britain’s quality champions is a salutary tale of how even the best businesses can become poor investments when bought at the wrong price. The speculative fever of the low-rate era has definitively broken. For potential investors, this is no bad thing. The fog of multiple expansion has lifted, allowing a clearer view of the underlying fundamentals.

While the decline has been painful, it has also been healthy. It has returned valuations to the realm of sanity and reminded us that long-term returns are ultimately tethered to profits and cash flows. However, the fate of Spectris serves as a powerful illustration of the dangers this creates. As a provider of high-tech precision measurement instruments, its technology is essential for cutting-edge industries. Spectris had been undertaking a complex, multi-year consolidation. While strategically sound for the long term, this process of selling legacy businesses to acquire and focus on higher-growth areas created significant short-term uncertainty for investors. This was compounded by cyclical headwinds, including a slowdown in demand from China and a cooling in markets related to electric-vehicle battery development. The market, fixated on these immediate challenges, punished the shares, pushing down valuations to a level that failed to reflect its long-term strategic value.

This created a dangerous vulnerability, highlighting a key theme of the current market: if public investors will not pay for quality, private buyers will. The takeover bid from private-equity firm Advent International was a wake-up call to the market, demonstrating that, while public shareholders saw short-term problems, sophisticated buyers saw a world-class technology business on sale at a discount. The low valuations afflicting Britain’s quality companies do not just represent a potential opportunity for new investors; they also represent an existential threat. If the market undervalues the intrinsic quality of these firms for a pronounced period, they will inevitably be acquired and taken private, lost to public shareholders forever.

This dynamic means patient investors must now balance the opportunity for re-rating with the very real risk of a takeover bid that removes the stock from public markets. Perhaps a more fitting title for this new chapter is not one of decline, but of renewal, albeit one with a significant caveat: “Britain’s fallen stars: a second chance for quality, or a pathway to private ownership?”.

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When chancellor Rachel Reeves was seen with tears in her eyes in the House of Commons recently, it was probably because she had been contemplating the prospects for the economy over the next few months. She promised she would generate “growth, growth, growth”, but so far, there has been very little sign of it. Her Budget last autumn stopped the economy in its tracks. The non-doms fled. Companies put a freeze on hiring. It has been a dismal start to her time in office, and it’s not now clear how long she can survive.

Yet she can claim one achievement. The FTSE 100 hit an all-time high this week, briefly nudging through 9,000. It fell back soon afterwards, but it is still up significantly on the year so far. It could even punch through the psychologically significant 10,000 barrier later in the year. It may not be long before we see Reeves brandishing a chart of the index to show how well she is doing and claiming that global investors are backing her policies.

The FTSE 100 is still lagging far behind

Still, the reality is that there is nothing to celebrate. The FTSE is only just starting to catch up with markets around the world after years of dismal underperformance. The index hit 6,930 all the way back in December 1999, meaning it has taken 25 years to add just another 2,000 points. For a comparison, Germany’s Dax index has tripled over the last 25 years. In the US, the S&P 500 has risen fourfold over the same time period; the tech-heavy Nasdaq more than six-fold. True, the CAC-40 in Paris has done almost as badly, but otherwise every other major index around the world has soared past the FTSE 100. Indeed, simply to have kept pace with its peers the index should be somewhere between 20,000 and 30,000 by now. In that context, 9,000 does not look like anything to get very excited about. The returns have still been miserable compared with what you might earn elsewhere.

What success it has had won’t last. The FTSE 100 is a very international index, with companies from Shell to GSK to Diageo earning most of their profits from the rest of the world. But it is still basically tied to the British economy. And the outlook for growth in this country is grim, and getting worse all the time. Foreign investment has collapsed, retail sales are flat and very few new jobs are being created.

Worse, with the government desperate for extra money to spend, taxes are inevitably going to rise, and businesses will bear the brunt of that, just as they did last time around. We may well see higher business rates for big shops and warehouses, an extension of windfall taxes on the energy companies and the banks, and we may even see a “temporary” corporation tax surcharge, modelled on the levy that was charged in France last year. Whatever form it takes, it will mean lower profits and lower dividends to distribute to shareholders, and that will stop the index from climbing much higher.

The FTSE 100 – a dull backwater

Finally, companies are still leaving, with a wave of major businesses choosing to list their shares in New York instead of London. The likes of Flutter and Wise have already gone; even the largest company quoted on the FTSE, the pharmaceutical giant AstraZeneca, has discussed a move to the other side of the Atlantic. Meanwhile, fast-expanding new businesses, such as the fintech star Starling Bank, are looking towards Wall Street instead of the City, and global companies, such as the Chinese fast-fashion powerhouse Shein, are turning down the opportunity to list here. For an index to grow at a decent rate, it needs a steady stream of faster-growing new companies to join it, and to replace the older, more mature giants that don’t have much potential for expansion. The FTSE 100 has entirely lost the ability to attract those kinds of businesses, and that is going to make it very hard to keep up with its peers, especially in the US.

The blunt truth is that the FTSE is turning into a backwater – and investors are still a lot better off putting their money to work elsewhere.

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London’s Aim market turned 30 this month, but few are celebrating. The 1990s dream of an “accessible” venue to help small UK firms grow has gone largely unrealised, says Richard Evans of Fidelity International.

Listings on the London Stock Exchange’s junior market have fallen below 700, down from a peak of 1,700 in 2007. In the year to February, 61 firms left Aim and only ten joined. The FTSE Aim All-Share index has retreated 13% over the past five years.

Rather damningly, it is also in the red over 30 years “even with dividends reinvested” – the result, in part, of “numerous” victims of the dotcom bubble implosion in the early 2000s, and long-shot listings by tiny, high-risk commodity outfits.

Despite some genuine success stories, the market’s reputation has been blighted by too many duds and “not a few scandals” – notably including accounting trouble at bakery Patisserie Valerie. Light-touch regulation that was supposed to be a selling point ended up attracting a “disproportionate” share of unscrupulous “company promoters”, including a handful of “outright fraudsters”.

Listing standards have been tightened in response, but the narrowing regulation gap between Aim and London’s main market has only made the former less appealing, says Ian Conway in Shares. The CEO of one unnamed Aim stalwart says the annual cost of maintaining a quote, including exchange fees, is “around £750,000”. Growing red tape consumes the time of small management teams.

All of this hassle just to secure a listing on a market with far worse liquidity than on London’s main board – “even on a good day, the bid-offer spread on many Aim stocks can be 10%-15%”, compared with “fractions of a percentage point” on the senior market. Another blow is coming in April, when Aim inheritance-tax breaks will be halved.

Radical solutions to fix Aim

Aim’s woes have become so profound that some reach for radical solutions. Last year a think tank proposed scrapping the tarnished Aim brand and merging it with the main market. But “Aim is worth saving”, says Rosie Carr in the Investors’ Chronicle. For all its failings, it remains a rare platform for nurturing British growth firms. Aim firms deliver £5.4 billion in tax revenue, and support 410,000 jobs. Britain already has a problem with helping promising start-ups to scale up. Scrapping one avenue to keep innovative firms on these shores would be self-defeating.

Could Aim investors enjoy a turnaround? The risks are high, but as James Henderson notes in the Financial Times, historically smaller and midsized shares have beaten the blue chips, delivering a 6% annual performance premium between 2009 and 2021. The recent run of large-cap outperformance may not last. Aim’s challenges shouldn’t be understated, but “we might reasonably expect some reversion to [the] mean”.

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It is not exactly the snappiest name. The Private Intermittent Securities and Capital Exchange System – which, handily, can at least be shortened to Pisces – will create a new, lightly regulated platform for trading equities in the City. A private business will be allowed to sell some shares on one of the official platforms as and when it chooses, and investors can then trade them on if they wish to. In effect, it will allow private companies to use the plumbing of the stock market without the hassle and expense of a full-scale listing. The Financial Conduct Authority has finalised its rules for the market and the aim is for it to be up and running by the end of the year.

It will only be open to sophisticated, high-net-worth individuals, along with institutional investors, and is at least a sign that something is being done to address the exodus of companies from the stock market. Only this month, Wise, easily one of the most consistently successful technology companies in Europe, announced it was moving its primary listing from London to New York. That came only a few weeks after the Chinese fast-fashion giant Shein, a controversial but huge business, decided to list in Hong Kong instead of London. Overall, the number of companies listed in London has fallen from 2,400 a decade ago to just 1,600 now and, even worse, there are virtually no new listings to replace them, with only 18 initial public offerings (IPOs) last year, raising a mere £770 million. On current trends, the London market will have ceased to exist by the 2040s. Pisces is an attempt to reverse that.

There is a case to be made for the new market. It will sit just above the crowdfunding platforms, but below the junior Aim market. The aim is to create a more lightly regulated regime that will allow growing businesses to take their first steps towards a listing and create a conveyor belt of new businesses heading for the main market to replace those that have left.

Three key flaws with Pisces

There are three big problems, however. First, although the main market without question has too many rules – a major reason so many have quit – Pisces may well have too few. There won’t be any requirement for major shareholders to announce further dealings. Companies traded on Pisces won’t have to apply any specific accounting standards.

Their accounts will not even have to be audited (although they will at least have to say whether they have been). To describe it as a Wild West market would be unfair to 19th-century American frontier towns. It is hard to imagine that even well-informed private investors – MoneyWeek readers, for example – will be tempted to put money into the shares traded on the new exchange. Unless they know the directors personally, they literally won’t have a clue what is going on at the business. As for institutional investors, it will be very hard for pension-fund trustees to sanction that kind of risk-taking when they can invest in Unilever and Vodafone instead.

Second, where are the tax incentives? For the new market to take off among private investors, it would help if there were some significant tax savings to be made. After all, money is being put into riskier, smaller companies, but with the potential for rapid growth. And, of course, inheritance-tax relief in Aim shares is being scaled back following the last Budget, so there would have been a strong argument for offering something to Pisces investors instead. But no. Anyone buying shares on the platform will owe the same taxes as they will on any other investment. It hardly seems worth it, given it will inevitably be far less safe.

Finally, it does not address the real problem. With the enterprise investment scheme, and venture-capital trusts, the UK has actually been pretty good at putting money into small, emerging companies. It is persuading them to move onto the main market instead of selling out as soon as a generous offer arrives from one of the tech giants, or listing their equity in the US where it will be more generously valued, that is the problem. Creating a new, lightly regulated market for very small trades doesn’t do anything to address that.

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Some listed companies quietly compound wealth for investors without ever making mainstream headlines. One such is Spectra Systems (Aim: SPSY), a niche technology firm that has rewarded shareholders handsomely since its listing on the junior market in 2011.

While many “boffin-led” companies struggle to commercialise their innovations, Spectra has bucked the trend. Its management team is led by CEO Nabil Lawandy, who has a PhD in chemical physics and was a professor of physics at Brown University for 18 years. The company blends technical brilliance with rare business acumen – an unusual and potent combination. With new products in development and management bullish about future opportunities, Spectra’s next chapter could be just as rewarding as its past if these initiatives succeed.

Spectra develops security and authentication technology, primarily for banknotes and secure documents. Central banks, government agencies and commercial customers rely on its products to combat counterfeiting and fraud. For investors, Spectra has been a hidden gem, delivering strong revenue growth and consistent profitability while maintaining a robust balance sheet.

Spectra’s total return to investors has been exceptional. The shares have gone up more than tenfold in the last eight years, with a good amount of dividends adding to the total return. In an era where many technology firms prioritise growth at all costs, Spectra stands out for its disciplined approach. The company is cash-generative, with high margins and a record of returning excess capital to shareholders.

How Spectra Systems leapt the early hurdles

Yet it hasn’t all been smooth sailing. Spectra’s early years as a listed company were marked by challenges, including delays in contract wins and periods of opaque revenue recognition. However, the company’s resilience and ability to refine its commercial strategy allowed it to overcome these hurdles. By focusing on high-value contracts with central banks and secure printing firms, it has built a business that enjoys strong client retention and recurring revenues. It has successfully adapted to the evolving security needs of its clients, ensuring that its offerings remain relevant and indispensable.

The story of many science-led companies is one of technical brilliance paired with commercial naivety. That is not the case at Spectra. The CEO is an inventor with more than 80 patents, but he also understands markets. Under his leadership, Spectra has consistently commercialised its technology, won key contracts and expanded its addressable market. Its ability to bridge the gap between innovation and real-world application is a major part of its success. Unlike many Aim-listed tech firms that rely on endless capital raises to stay afloat, Spectra has grown organically, avoiding shareholder dilution and remaining profitable.

Spectra’s pipeline of new products offers further reason for optimism. The company is developing technology beyond its traditional core, positioning itself in high-growth adjacent markets. One of the more promising areas of development is its work in secure polymer banknotes. With countries shifting from paper to polymer notes, the demand for advanced security features is rising. Spectra is developing new authentication materials specifically designed for polymer substrates, a move that could deepen its relationships with central banks and provide a new revenue stream.

Another promising innovation is in secure gaming. Spectra has developed authentication technologies that could be applied to the lottery and casino industries, helping operators prevent fraud and improve security. Given the multi-billion-dollar size of the global gaming market, this could represent a significant new opportunity should demand materialise. Spectra is also working on a cutting-edge method of detecting counterfeit pharmaceuticals. These drugs cost the global economy billions annually, so a robust solution could be highly valuable.

Management remains confident about the future. In recent updates, the company has pointed to a strong pipeline of opportunities, with the CEO emphasising that Spectra is well-positioned to capitalise on structural growth trends in banknote security, authentication and secure transactions. The company’s continued investment in research and development should ensure it stays ahead of emerging threats and remains indispensable to its clients.

Aim's quiet success story

Small-cap stocks always come with risks – particularly those with exposure to large contracts – but Spectra’s established relationships, strong balance sheet and diversified innovation pipeline should prove resilient. Its ability to identify commercial applications for its technology and execute effectively sets it apart from its peers.

Spectra is one of Aim’s quiet success stories. It is worth watching closely. If its next phase of growth is as successful as its past, the company could continue delivering exceptional returns, making it an under-the-radar winner for years to come.

The market seems not to have fully cottoned on to its potential. The shares aren’t trading at bargain-basement prices, admittedly, but they also don’t seem fully to capture the substantial growth that could lie ahead. Adding a touch of sweetness to an already appealing proposition, the company offers a rather attractive dividend yield exceeding 4%. This means shareholders can enjoy a steady income stream while patiently awaiting the moment when the market wakes up to Spectra’s true value.

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