AJ Bell Investments: UK political change doesn’t mean market doomsday

Keir Starmer’s resignation has added another layer of political uncertainty for UK investors. But for the AJ Bell Fund range, the investment message is more balanced: UK equities, particularly large caps, still offer attractive valuations, useful diversification and a currency-sensitive earnings profile that can help offset domestic uncertainty.  

The key thing to remember is that the FTSE 100 is not the UK economy. Many of the largest UK-listed companies are global businesses, with revenues linked more to overseas demand, commodity prices, interest rates and currency movements than to Westminster. This means that when the pound is weaker, it can flatter earnings generated overseas which are then reported in sterling. Since Starmer’s resignation, we’ve seen the pound soften against the US dollar. This can help to partially offset internationally exposed UK companies at a time when domestic sentiment is fragile.

This is shown in the data below. There have been 27 months since the start of 2021 where US market declined, and the UK equity market outperformed in 21 of those months.  

Looking through the noise  

The AJ Bell Fund range’s approach to UK equities is grounded in long-term portfolio construction, not home bias. A measured UK allocation, focused on large cap indices, helps to diversify equity exposure, reduce dependence on mega-cap technology and retain access to a market that remains attractively valued. By doing this, we can avoid the troubles of more domestically focused UK small caps, an area traditionally part of a portfolio with a home bias.  

It’s possible that UK political headlines will remain unsettled for many months, leaving the markets to watch for movement in the leadership process, appointment of a new chancellor and any signals on fiscal policy. But investors should be wary of allowing political noise to dominate long-term investment considerations, and within the AJ Bell funds, we’ll remained focused on longer term, and more predictable, market patterns.  

UK equities are not a pure play on Westminster. The large cap market is global, diversified and sensitive to currency moves, while the broader market’s valuation discount and differentiated sector mix continue to support its role in diversified portfolios.  

The near-term headlines may be uncomfortable, but the portfolio case for large cap UK equities, particularly as a counterbalance to the tech race in the US, remains intact.

How UK stocks provide diversity

The UK market has a very different sector profile from global and US indices, with less exposure to mega-cap technology and more weight in financials, energy, healthcare, consumer staples and industrials.That diversification has been particularly useful during recent bouts of AI-related volatility. With US and global indices increasingly driven by a narrow group of technology and semiconductor names, the UK market’s lower exposure to this theme and greater weight in cash-generative, value-oriented sectors has helped provide a different source of equity return when enthusiasm around AI has faded.  

Valuation also remains important. UK stocks have traded at a persistent discount to global peers, reflecting weaker domestic growth, political instability, Brexit-related uncertainty and lower exposure to high-growth technology companies. But low expectations can be helpful for long-term returns if the companies continue to produce strong earnings, calming market fears.  

Recent takeover activity reinforces that point. Bids for UK-listed companies, including DCC, Tate & Lyle, Darktrace, Britvic, Direct Line, Spectris and now Segro, to name a few, suggest overseas and private buyers continue to see value in the market. This can crystallise value for shareholders.

Portfolio implications  

The resignation of a prime minister is politically significant, but portfolio decisions should still be based on long-term asset class roles rather than short-term headlines. For diversified portfolios, the main implications are:  

• UK markets continue to provide diversification through their lower correlation to global markets and sector mix.
• Sterling weakness can support internationally exposed UK large caps through the translation of overseas earnings.
• The FTSE 100 should not be treated as a simple proxy for the UK economy, given its global earnings base.
• UK valuations remain attractive relative to many developed markets and could support long-term returns if sentiment improves.
• Large caps may be better insulated from domestic political uncertainty, while mid and small caps are more exposed to UK fiscal policy, consumer confidence and gilt yields.