Investing in the UK when the economic environment feels weak might feel counterintuitive. While the perception of the UK economy is turbulent, the stock market has told a very different story.
As of 3 December, the FTSE All Share has returned 21% this year, near double the returns from the S&P 500 for UK investors. So, what is going so right for the FTSE?
Mainly, the index is offering investors something that has been catching a lot of attention recently: diversification. Fears around the US dollar and an AI bubble have led many investors to redistribute assets across other markets, and the UK holds a fair amount of appeal in this area. Tech only makes up around 3% of the FTSE All Share, while financials account for 28%, industrials 12%, consumer staples 14% and healthcare 13%.*
While some of these sectors may be a bit more sensitive to the global economic growth cycle, there are also plenty of stalwarts of the markets, which appeal to investors in times of uncertainty. Whilst wider markets have had a very good 2025, some of these more defensive companies have also performed very well.
These diversification benefits are one reason why the UK makes up 24% of AJ Bell’s Global Growth fund in 2025, our highest equity weighting. In comparison, the US makes up 16%.
Even with the attraction of diversification, the UK market hasn’t been a favourite among investors for quite a while. So why is the AJ Bell investment team a fan? We promise, it’s not just home bias.
Why the UK market isn’t just a reflection of its economy
The UK market is diverse not only in sectors, but gives access to some very large global companies, not just those tied to the UK economy. These include companies like HSBC, which has a large amount of its business in Asia, and Shell, which makes most of its revenue in Asia and Africa. For these large, international companies, which are often part of prominent indices like the FTSE 100, it’s been a fruitful year.
Of course, the vast majority of companies listed in the UK are smaller, and much more dependent on the UK economy than the members of the FTSE 100. Despite this, the UK index that encompasses both these small and large companies, the FTSE All Share, is on track for its strongest year since 2009. How is this possible when most of its members have struggled?
What’s essential to remember about investing in the UK through an index-tracking fund is that the weighting of different holdings in the index is often based on the market capitalisation of the different companies, not distributed equally between the companies. This is the case for the UK indices held in the AJ Bell funds, so it means that most of the exposure is held in these large, global companies. For example, in the FTSE All Share, the FTSE 100 still makes up 87% of the weighting.
It’s been a tougher year for the smaller companies in the UK, with the FTSE 250 returning 10.4% so far this year. But the 22.7% return of the FTSE 100 has been able to comfortably power the index forward.
What has gone so well for the UK markets?
The financial sector of the FTSE All Share (without investment trusts) has returned 36.3% this year to the 3 December. Lloyds has been one of the leaders with an 83% total return, as is Prudential with a 75% return. In comparison, tech giant Nvidia has returned 33.8% year to date, and Google-parent Alphabet has returned 69%. The financials performance is thanks to a few different factors, including a sticky inflation environment that has meant that interest rates have stayed higher for longer.
For individuals, high interest rates can be problematic when trying to get a mortgage on a home or another loan. But for the institutions offering them, it means they are receiving a higher return for lending out money, which bulks up their profits.
Notably, financials can be a highly cyclical sector, and the high interest rates mean it's a particularly fruitful time. But this is where the benefit of the UK’s diversification comes into play. A much less cyclical industry, aerospace and defence, has also been flourishing. This industry, which is featured in some of the FTSE 100’s top companies like Rolls-Royce and BAE Systems, has skyrocketed this year amid international conflict, and an increasing pressure in Europe to increase defence spending.
It’s unrealistic to expect every year in the UK market to be as fruitful as 2025 has been. But, for a market that is offering a more stable option to those investors getting nervous around AI, the growthy returns have been a cherry on top.
*Source: FTSE Russell, as of 28 November 2025
James Flintoft: Head of Investment Solutions
James has over a decade of experience running MPS and managed accounts for intermediaries. After graduating from Northumbria University with a first class degree in Finance & Investment Management, James joined a regional DFM, where...
