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London's unloved shares are attracting foreign investors

London's unloved shares are attracting foreign investors

The UK stock market is finally reversing its years-long underperformance compared to the rest of Europe. This comes as a result of a UK/U.S. A trade agreement, a softer regulatory environment and cheap stocks are delivering juicy returns which are beginning to attract foreign investors.

The FTSE 100 is up nearly 10% in the last year, and has reached record highs, surpassing the STOXX 600 which is up 7.5%.

London's blue chip index performed better on a year to date basis than its European counterpart in the last six week, the longest stretch of its kind since the end of 2022 when a weak pound boosted revenues for the export focused FTSE.

The financial regulator announced this week that it would roll out new regulations to boost Britain's Capital Markets. Meanwhile, Chancellor Rachel Reeves asked the financial industry for a more positive picture of UK shares to be painted to potential retail investors as she sought new ways to revive an economy in stagnation.

Asset managers claim that the UK narrative is changing, and the blue-chip index already looks appealing to foreign investors given the sterling's rally in this year.

Justin Onuekwusi is chief investment officer of St. James's Place. He said, "We see signs that big asset allocators are coming back to the UK." He said: "I'm talking about non UK endowments and pension funds as well as asset owners, wealth management firms, who all underweighted the UK after Brexit."

The FTSE-100 has risen nearly 18% in dollar terms so far this season, marking the highest dollar-denominated gains since 2009. This compares to a 6% gain year-to-date for the S&P 500 which also reached record highs.

The pound is up 7% against the dollar this year as investors flee U.S. assets due to increased policy uncertainty in the U.S. under President Donald Trump. This acts as a drag on FTSE members, 80% whose revenues come from abroad.

The index is insulated from the economy's swings by its large defensive companies like AstraZeneca, Tesco, and healthcare.

The company also holds growth-sensitive resources such as Anglo American, BP and other companies that can tap into the strength of oil, copper and Gold.

Britain is one of few countries that are less concerned about trade uncertainty because a U.S.-UK trade agreement has been signed. The European Union, on the other hand, faces 30% tariffs in the event of a failure to reach an agreement by August 1.

'TEA AND BISCUIT

The UK stock market can be a calming cup and biscuits in an uncertain time. "There's nothing fancy, just names that are reliable and do their jobs day after day," AJ Bell Investment Analyst Dan Coatsworth stated.

Since years, the valuations of FTSE-100 companies has lagged behind those in Europe.

Brexit in 2016 accelerated this trend. Fewer companies listed their shares on the London Stock Exchange and few were used as M&A targets.

The UK market has caught up. The FTSE-100 12-month forward P/E ratio is at 12.5, the highest in five years. This compares to 14.11 for STOXX. It's the smallest gap for 18 months.

S&P is trading at a premium of nearly 10 points to the FTSE compared to just 2 points a decade ago.

The relative poor performance in the UK, compared to the U.S., over the last two years is beginning to reverse. Michael Stiasny said that we're at the beginning of this. He added that the UK equity market had traded at "significant discounts".

The pound has reached a high of four years against the dollar but is weaker against the euro. This year's weakness against the euro offers a boost to FTSE exporters.

Official data shows that the EU will be Britain's biggest trading partner in 2024. The United States will follow with 22%.

Not everything is rosy. The British economy has slowed down, business activity is slowing and employment is declining. Inflation is above the Bank of England target of 2%.

Barclays data indicates that UK equity has seen a net outflow in 2025 of $20 billion, though outflows are almost non-existent in the past month. This compares to Europe's $13 billion year-to date inflow and its rapidly slowing inflows.

Sebastian Raedler is the head of European Equity Strategy at Bank of America Merrill Lynch. He believes that the FTSE has been performing well because of the currency, and it's in line with Europe.

He said that a 2% increase in the FTSE by 2025 compared to the STOXX would be a minor improvement.

(source: Reuters)