How to invest in the UK stock market this election season – and is it worth it?

The UK stock market has had a strong year so far, but remains unloved with investors. This has a fair bit to do with politics. 

With election fever running high, your mind might jump straight to the current Sunak-Starmer race. But the series of events that has led to UK equity outflows in recent years goes back further to 2016.

Much like now, it was the month of June and the Euros were gripping the nation. England suffered a humiliating defeat to Iceland at the first stage of the knockouts, prompting manager Roy Hodgson’s resignation. 

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But this wasn’t the UK’s only exit from Europe that month. As football fever shook the continent, the UK was still reverberating from its decision to leave the European Union after voting ‘Leave’ at the referendum on 23 June. 

Brexit hit the domestic market hard and UK equities have been undervalued ever since – both compared to their peers in the US and relative to their own history. 

Covid followed hot on Brexit’s heels (just as the terms of the withdrawal agreement were being finalised), and inflation then proved stickier in the UK than elsewhere. This was partly driven by the country’s overreliance on gas compared to other European markets.

You could call it a series of unfortunate events. So what’s the good news?

In short, this challenging period has created the opportunity for investors to snap up UK companies at bargain prices. After several years of headwinds, UK equities have been having a strong year in 2024 – and some experts think they still have further to go. 

We look at the risks and opportunities – including the general election – and highlight seven funds that offer diversified access to the UK stock market. 

How much of a bargain do UK equities offer?

The FTSE 100 has soared to record highs this year – but many experts believe UK equities are still undervalued. Jason Hollands, managing director at Bestinvest, points out that they are trading at a “wide discount” compared to global equities and their long-term average.

He says: “Whereas UK equities are currently trading at around 11.6 times their forecast earnings for the next 12-months, global equities (as measured by the MSCI All Country World Index) are trading at 17.5 times.”

If a company is trading at 11 times its earnings, this means it would take 11 years to make back the money you paid out for the stock (unless of course you sold it before the end of this period). In other words, investors are willing to pay a higher premium for global equities than UK equities right now.

The disparity between UK and global equity valuations is partly a reflection of “the very different sector composition of the UK market”, Hollands explains. It is less exposed to tech stocks which are currently trading at lofty valuations. That said, he points out that a sector-by-sector comparison still shows UK companies trading at a discount. 

“UK energy companies are trading at 7.9 times earnings, whereas globally the average is 10.6 times,” he explains. “Likewise, UK banks – a sizeable component of the UK market – are trading at 6.9 times earnings, but the global average is 9.9 times.” 

What’s more, despite strong performance so far this year, UK equities are still cheap compared to their historic valuations. “The 20-year median valuation for UK equities is 12.4 times earnings, so currently UK equity multiples are also -7% lower than the longer-term trend,” Hollands explains. 

Will the general election impact UK equity markets?

In recent weeks, MoneyWeek has shared extensive analysis on what the election could mean for UK equities. We have looked at whether Labour or the Conservatives are better for the stock market, as well as diving into various sector opportunities ahead of polling day.

The long and short of it is that neither Labour nor the Conservatives appear to have any big economic surprises up their sleeve. Both have been vocal about their commitment to ensuring economic stability. 

While former Labour leader Jeremy Corbyn was widely seen as being business-unfriendly, Keir Starmer has been at pains to point out that he is leading a “changed Labour” which is “pro-growth” and “pro-business”. 

With this in mind, UK equity investors probably don’t need to worry too much about the effects of the election on portfolio performance. As MoneyWeek’s former executive editor John Stepek points out in a newsletter for Bloomberg, investors would be better off making sure the admin side of their portfolio is in order.

“A change of government might not do much to move the dial on the prices of shares. But it could certainly lead to a bigger tax bill when you come to sell, or lower tax-efficient allowances for when you’re investing in the first place,” he says.

The Conservatives ruled out increasing capital gains tax in their manifesto, but Labour has been quiet on the issue so far and the Liberal Democrats and Green Party have said they would like to raise it. 

One potential benefit could be the introduction of the British ISA, announced in Jeremy Hunt’s Spring Budget. The government recently finished consulting on this measure, which would offer an additional £5,000 ISA allowance each year for UK investment. In theory, this (combined with pension reforms both parties are planning) could boost investment into UK markets, giving them a further lift.

MoneyWeek recently looked at what’s rumoured to be included in the British ISA – but after no mention of it in the Conservative manifesto (and a limp reception when it was first announced), there’s a chance it could be dead in the water. Investors will have to wait and see what happens on 4 July.

Outlook for UK equities

While watching the general election play out is certainly exciting, the timing of interest rate cuts is likely to have more of an impact on market performance. Rate cuts are generally good news for equity markets, as they tend to boost the economy and earnings, resulting in stronger company performance. 

The Bank of England held rates at 5.25% for the seventh consecutive time today (20 June), but many experts are still hoping for a summer rate cut when the Monetary Policy Committee next meets on 1 August. 

In the meantime, there are several reasons to feel constructive about UK equities, in Hollands’ view. “Valuations are low which is a good starting point, dividends are attractive but generally well covered by earnings and with headroom to grow, and overseas buyers and private equity can clearly see the opportunity given the frenzy of bids we are seeing this year,” he says.

Indeed, companies have been leaving the London Stock Exchange at a worrying rate in recent years – partly due to this spate of buyouts. This suggests overseas investors are seeing something that domestic investors are missing. 

On top of this, the UK stock market has long been known as “a good place to look for dividend income”, says Hal Cook, senior investment analyst at Hargreaves Lansdown. “With mature industries like banks, oil and gas, and tobacco, this shouldn’t come as a surprise,” he adds.

But dividends aren’t the only way companies return value to shareholders – share buybacks are an important strategy too. And many UK companies have been making good use of this mechanism in recent months. 

“The UK market currently has the highest ratio of companies doing this of any major market, even the US where buybacks have long been more commonplace,” says Hollands.

How to invest in the UK stock market

If you’re looking to take advantage of the discount on offer in the domestic market, the most straightforward way to invest is to buy a diversified UK equity fund. 

There are hundreds of funds on the market, but an important first step is to decide whether you want to go down the active or passive route. 

Active funds try to beat the performance of a benchmark by selecting the companies that have the most compelling prospects. Meanwhile, passive funds (also known as index trackers) mirror the performance of a broader stock market index, such as the FTSE 100 or the FTSE 250. Passive funds generally come with lower fees. 

Once you have decided which type of fund to buy, you should think about investment style and market cap. Do you want a fund that focuses more on income, growth, or a combination of the two? Would you be better off with a large, medium or small-cap fund? 

Each fund will come with a different risk profile, so it’s important that you read this carefully to ensure it’s appropriate. If you’re not sure, speaking to an investment adviser or robo-adviser might be helpful.

Seven UK equity funds to consider

There are hundreds of UK equity funds on the market, which can make the process of selecting one feel overwhelming. 

The experts at Bestinvest have highlighted four active funds that they are keeping an eye on right now. Meanwhile, the team at Hargreaves Lansdown has highlighted three passive options. We take a closer look. 

• Artemis UK Select: This is a best ideas fund that targets undervalued growth companies. Its top holdings include Barclays, NatWest, 3i Group, Shell and Rolls-Royce. The fund has returned a cumulative 70.3% over the past five years, compared to the FTSE All-Share which returned 30.1%. The fund’s peer group (the IA UK All Companies Sector) returned 20.1% over the same period.
• Three investment trusts to consider: Investment trusts can be a good way to access the UK equity market, as they work a little differently to investment funds. Trusts are openly traded on the market, which means they can trade at a discount or a premium to the value of their underlying assets. Three that the team at Bestinvest like include Temple Bar Trust, Murray Income Trust, and Fidelity Special Values Trust. Each is currently trading at a discount. 
• iShares PLC Core FTSE 100: If you want to match the performance of the 100 largest publicly-traded UK companies, Hargreaves Lansdown suggests this index tracker could be a good one to consider. It invests in every company in proportion with its index weight.
• iShares UK Dividend ETF: This passive fund “offers exposure to 50 of the highest dividend-paying stocks listed in the UK”, Hargreaves Lansdown explains. If you are looking for an income-generating investment, this could be a good option for you. The top holdings currently include HSBC, Vodafone, Imperial Brands, British American Tobacco and Rio Tinto. 
• Vanguard FTSE 250 ETF: If you’re looking to invest in medium-sized companies (which can have better long-term growth prospects than large-cap companies), then an index fund which tracks the FTSE 250 could be of interest. “These businesses make more of their money domestically than their FTSE 100 counterparts,” Cook explains. This is something to bear in mind as it means the index is more exposed to the individual fortunes of the UK economy.