Advisers see UK equities as ‘generational valuation opportunity’

The UK is increasingly seen as a key destination for active equity investors, with advisers viewing UK equities as a ‘generational valuation opportunity’, according to a study from Rathbones Asset Management.

Its survey of independent financial advisers (IFA), discretionary fund managers (DFM) and private bank selectors found equity investors were being drawn to UK stocks by attractive valuations, long-term growth potential, and earnings resilience.

More than nine in 10 (93 per cent) advisers believed UK equities represented a generational valuation opportunity, with 88 per cent agreeing and 5 per cent strongly agreeing.

Over the past 12 months, 74 per cent of fund selectors surveyed had increased their total portfolio allocations to the UK.

A quarter (25 per cent) made no changes, while just 1 per cent decreased their investment in UK stocks.

“After years of being overlooked, sentiment looks to be improving,” Rathbones Asset Management director of equities, Alexandra Jackson said.

“The UK market offers access to high-quality companies at attractive valuations, many of which generate significant revenues globally while also offering compelling income for investors.

“There is significant variation in company quality, earnings resilience and long-term growth potential across the UK, which creates opportunities for skilled stock pickers to add value.

“In a market where valuations remain attractive but inefficiencies persist, active management can help investors identify selective opportunities across UK equities.”

Its study also highlighted an appetite for active approaches to UK equity exposure, with 74 per cent of respondents saying they construct a custom portfolio using individual direct shares.

Just 6 per cent exclusively used passive index tracking funds, while 3 per cent outsourced entirely to active UK equity managers and one in seven used a managed direct share portfolio to invest in individual UK stocks.

Respondents saw mid-cap equities as an opportunity, with 73 per cent of respondents saying they were likely to increase their allocations to UK mid-caps this year and 25 per cent very likely.

“UK mid-cap companies stand out as an attractive catch-up opportunity, offering exposure to innovative, high-quality businesses that could benefit as investor sentiment improves and interest rates normalise,” Jackson added.

“In a world where many global equity markets appear fully valued, UK equities may play an increasingly important role in building resilient, diversified portfolios for clients.”

However, the research also indicated fund selectors were wary of risks within parts of the UK market, especially the concentration of the FTSE 100.

Around 16 per cent were ‘critically concerned’ that the index was too top-heavy, 72 per cent were moderately concerned, and 12 per cent saw FTSE 100 concentration as a minor issue.

“While many of the FTSE 100's largest constituents are exceptional businesses with international revenue streams and attractive dividend characteristics, relying too heavily on a small number of companies can limit diversification and increase portfolio risk over time,” said Jackson.

“This is where active management can add value. It gives investors the flexibility to look beyond the index, balancing exposure to high-quality large-cap names with carefully selected mid-cap and underappreciated businesses that offer long-term growth potential and exposure to new themes.”

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