A cyclical case for UK stocks

(Image credit: Getty Images)

published 13 June 2025

China is undoubtedly the major stock market least popular with foreign investors. Yet there is another economy with consumers who are reluctant to spend, an unhealthy obsession with residential property, and more than a decade of anti-business governments with no idea how to boost growth – but where valuations are low (relative to other markets) and sentiment has been at rock bottom.

To be fair, that could describe a number of countries – but I am, of course, talking about Britain. My comparisons are more than a little glib (for a start, China has built too much housing, while the UK cannot build enough). Still, just as there is a case for at least a cyclical rally in Chinese stocks, you can make one for the UK.

The UK savings rate has risen significantly in recent years (ignoring the distortion caused by the pandemic). Starting from that high level means that there are savings and income that might be freed up to drive solid gains in consumer spending once people feel more confident, as Julian Cane of CT UK Capital and Income Investment Trust (LSE: CTUK) and James Thorne of CT UK Smaller Companies Fund point out.

Subscribe to MoneyWeek

Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE

Get 6 issues free

https://cdn.mos.cms.futurecdn.net/flexiimages/mw70aro6gl1676370748.jpg

Sign up to Money Morning

Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter

With inflation seemingly coming down – at least for now – there is plenty of scope for interest rate cuts. This should benefit housing-related businesses in particular: firms involved in property sectors are saying that if rates fall to 3.75% or so, the market should take off again, say Cane and Thorne. However, lower rates should reduce the blow for mortgage holders who are having to refinance expiring deals, which should be good for sentiment and consumption broadly.

Other UK small-cap specialists are making a similarly persuasive argument. A structural bull case for the UK remains more tricky for me to believe. I am sceptical that the government has any idea how to deliver the investment that Britain needs (as shown by the chancellor’s muddled “Mansion House Compact”). Still, brokers have a solid pipeline of UK smaller companies wanting to list once valuations become more attractive, say Cane and Thorne. In that case, a cyclical upturn could still become a virtuous circle that reverses the hollowing-out we have seen in recent years and makes the market far more compelling.

Cris Sholto Heaton is an investment analyst and writer who has been contributing to MoneyWeek since 2006 and was managing editor of the magazine between 2016 and 2018. He is especially interested in international investing, believing many investors still focus too much on their home markets and that it pays to take advantage of all the opportunities the world offers. He often writes about Asian equities, international income and global asset allocation.

Cris began his career in financial services consultancy at PwC and Lane Clark & Peacock, before an abrupt change of direction into oil, gas and energy at Petroleum Economist and Platts and subsequently into investment research and writing. In addition to his articles for MoneyWeek, he also works with a number of asset managers, consultancies and financial information providers.

He holds the Chartered Financial Analyst designation and the Investment Management Certificate, as well as degrees in finance and mathematics. He has also studied acting, film-making and photography, and strongly suspects that an awareness of what makes a compelling story is just as important for understanding markets as any amount of qualifications.