- UK continues to outperform the US stock market in 2025
- Investors could have doubled their money this year with two of the top performing FTSE 100 stocks
- The best performing UK funds year-to-date and how they differ
- Reasons why investors have switched from US to UK assets
- Comparing market valuations – US is expensive and UK is cheap
Dan Coatsworth, investment analyst at AJ Bell, comments:
“It’s been a wonderful time to invest in UK shares. The FTSE 100 recently went through the 9,000 level for the first time and has hit a new record high on multiple occasions this year.
“Year-to-date, investors would have made a 14.3% total return including dividends from a FTSE 100 tracker fund, excluding charges. That’s an attractive return and we’re only a little over halfway through the year.”
Right type of companies to appeal in an uncertain environment
“The FTSE 100 is full of the type of stocks that appeal to investors when there is uncertainty in the world. Investors seek companies with defensive qualities and the UK market has them in spades.
“Industries including tobacco, utilities and telecoms typically have steady earnings. They provide services which consumers and businesses need, and certain companies fall under the category of non-discretionary spending. We all have to pay energy and phone bills every month.
“The UK stock market has a wealth of defence contractors which have attracted investor interest against a backdrop of increased government spending on areas like cybersecurity and military forces.
“A wide range of banks and insurers have been on investors’ shopping lists thanks to generous dividends. While share prices in these sectors can move up and down regularly, investors put a premium on dividends when everything is looking bleak in the world, such as an economic slowdown or a fragile jobs market. They cherish dividends because they can provide a steady stream of cash to fill people’s pockets.
“Gold is often popular with investors during periods of uncertainty such as heightened geopolitical tensions. The price hit a new record higher earlier this year and that has created a tailwind for precious metal miners, including Fresnillo whose shares have more than doubled in value since January.”
Benefiting from investors updating their asset allocations
“Certain investors believe the US is a much higher-risk investment prospect under Trump and they’ve taken money off the table and reallocated to other parts of the world including the UK. This is a dramatic shift in thinking, given that the US has been a top place to make money for years.
“For example, UK investors took £622 million out of North American equity funds in May. That was the first outflow for this category of fund in six months, according to the Investment Association.
“Overseas investors are also reappraising the UK after a near-decade of being out of favour. The Brexit vote in 2016 caused foreign investors to lose confidence in the UK as it created uncertainties around trade. Constant leadership changes when the Conservative Party was in power until 2024 also made the UK less appealing to overseas investors.
“Political stability since last summer’s general election, along with the UK being the first to strike a trade agreement with the US under the Trump administration, have prompted certain overseas investors to think again about the UK’s situation and prospects. Relative to what’s happening in the US, the UK now seems a more stable environment.”
Best performing UK funds
“While nearly half of the companies in the FTSE 100 have beaten the overall index year-to-date, not everyone likes to buy individual stocks and shares. Those investing in funds were still able to outperform the market if they picked the right instruments.
“The top performing UK fund year-to-date is SVS Zeus Dynamic Opportunities, which invests across all company sizes listed on the UK stock market. It has a concentrated portfolio that includes stakes in defence and engineering groups Rolls-Royce and Chemring, airline EasyJet, and supermarket chain Tesco. Its outperformance can be attributed to clever stock picking.
“Better known is Ninety One UK Special Situations which positions itself as a ‘best ideas’ UK portfolio with a value tilt. Rolls-Royce is once again present, while it also invests in airline Jet2 and cigarette maker British American Tobacco. Its portfolio has a mixture of names delivering good news while also containing some that have faced challenges and where the fund manager has accurately predicted a recovery in the share price.”
Currency issues
“Dollar weakness will have spurred UK investors to look closer to home for opportunities. A weaker dollar versus the pound makes US assets less attractive.
“For example, since Trump’s inauguration on 20 January, an S&P 500 tracker fund priced in dollars would have generated a 5.7% positive return including dividends and excluding fees, whereas a pound-denominated version would have lost 4.5%.
“UK investors who maintained exposure to the US will be disappointed at this forex issue. However, it’s a good reminder to have diversified exposure and not be overly reliant on one part of the market to generate positive returns.”
The UK stock market remains cheap
“Valuation is another reason the UK has functioned as a magnet for people switching out of US markets.
“American shares are expensive when you look at popular valuation metrics. For example, the S&P 500 index trades on 22.2 times next 12 months’ earnings. Between 2014 and 2020, the index was on a much lower multiple, trading between 14 and 18 times earnings.
“In contrast, the FTSE 100 trades on a mere 12.6 times forward earnings. The UK market has been subject to widespread takeovers in recent years, and this trend remains intact in 2025 as the valuation anomaly continues to attract bidders.”
