UK Equities – Beyond the AI turbulence

UK equity funds continue to experience record outflows, raising concerns about the market’s investability. The UK’s economic outlook appears relatively subdued vs. European peers, characterized by persistently high inflation, a weakening labor market, and stagnant disposable incomes. However, recent inflation data offers some reassurance, suggesting stabilization and increasing the likelihood of further rate cuts – potentially providing a much-needed boost to growth.

Despite this, tail risk remains elevated under the current political regime: the FTSE All Share has lagged MSCI World by 30% over the past three years. The FTSE 250, more domestically exposed (50% UK revenues), has fared worse than the globally orientated FTSE All share (75% overseas). Consequently, it is understandable that the UK market has become less attractive to many institutional investors.

However, history suggests that such dramatic market dislocations are generally temporary. For investors willing to adopt a long-term perspective and swim against the current, the UK market may offer compelling rewards. We believe dislocation may create opportunity – and the time to look closely at UK equities could be now.

FTSE 250, FTSE All Share, and MSCI World 3-year total return (indexed to 100)

Source: Factset, as of 30 January 2026

With the global markets being driven by tech and AI momentum in the recent period, the UK has lagged behind with only one company making up the entirety of the UK technology sector. There are rising concerns over the potential resilience of the AI trade as reflected in the year-to-date volatility in the technology sector. In this context, the UK may offer an idiosyncratic opportunity with the key drivers being uncorrelated to the AI trade. The UK market has large exposure to cyclical sectors such as financials, energy and materials that may provide a degree of resilience and diversification against the current global backdrop.

Our approach is to maintain discipline and focus on value, seeking out investment opportunities that arise from current market dynamics. Rigorous bottom-up research and a keen eye for management quality are at the heart of our strategy. 

Moreover, while it may be too early to call out the winners in the AI race, we believe that AI-driven efficiencies will ultimately benefit well-managed companies across all industries, provided they are open to transformation and innovation. Notably, the Healthcare sector – which constitutes approximately 12% of the index – stands out as being a potential beneficiary, with significant possibilities for cost-savings, particularly in the drug discovery process. When combined with the sector’s currently depressed valuations, largely attributable to ongoing geopolitical concerns, this backdrop has created what we see as highly attractive investment opportunities.

Another area we think is particularly compelling is the Consumer Staples sector, which comprises a significant proportion of the FTSE All-Share Index (approximately 13%). Traditionally characterised by its defensive qualities, the sector has faced considerable volatility. Many companies within this sector, which once served as bond proxies in a low-interest rate environment, have seen their valuations decline as rates normalised and growth prospects waned. However, companies with strong leadership and renewed strategic focus are turning around, prioritising reinvestment and capital discipline – creating compelling long-term value.

Consumer staples: 3-year share price relative to FTSE All Share (indexed to 100)

Source: Factset, as of 30 January 2026

Beyond sectors, we would highlight the improving opportunity set within the small- and mid-cap space, which is heavily exposed to the UK economy, and has suffered a prolonged period of underperformance and now trade at record discounts to their historical valuations. Encouragingly, there has been a resurgence of deal activity, with interest from both foreign strategic acquirers and private equity investors, providing a degree of downside protection. Nevertheless, this alone does not constitute a comprehensive investment case. Our focus remains on companies where returns are currently suppressed by short-term headwinds, but where the underlying fundamentals are robust: strong management, healthy balance sheets, and attractive. Applying these criteria, we can identify compelling opportunities.

Despite persistent challenges, the UK market presents opportunities for contrarian investors and those seeking diversification beyond AI-driven momentum. For those willing to look past short-term headwinds, we believe UK equities offer significant long-term value.