After years in the shadows, the UK stock market is staging a remarkable recovery and is now positioned as a compelling opportunity for investors in 2026. This resurgence comes despite a prolonged period where retail investors shunned London-listed equities in favour of chasing higher returns overseas, particularly in US markets fuelled by AI excitement.
FTSE Outperforms Global Peers
While many missed the early signs, the London market has delivered strong returns in 2025. The FTSE 100 has surged 17.6 per cent year-to-date, reaching 9,718 pence. This performance has allowed it to outpace major indices, including the S&P 500, which gained 16.7 per cent, and France's CAC 40, up just 8.9 per cent. Investors who overlooked the UK's potential have missed out on equity gains of around 20 per cent.
Mike Coop, Chief Investment Officer for EMEA at Morningstar Wealth, noted that the market is turning a corner. "Investors have largely overlooked the UK, with Brexit fallout, 'AI mania' and the de-risking of UK defined benefit schemes dampening returns and deterring investor interest," he said. "However, the market is turning the corner this year and is primed for outperformance in 2026."
The Case for UK Market Diversification
A common misconception is that investing in UK stocks ties one's fortune solely to the domestic economy. In reality, the FTSE 100 offers significant international exposure. Approximately 75 per cent of the index's revenue is generated overseas, spread across the US, Europe, and emerging markets.
This global footprint insulates returns from purely UK-centric economic or political dramas. While the index is concentrated—with the top ten stocks comprising about 43 per cent of its total market capitalisation—its composition is sectorally diverse. It spans robust industries like pharmaceuticals, defence, energy, and banking.
For instance, consumer goods giant Unilever derives half its sales from emerging markets, while AstraZeneca generated 40 per cent of its 2024 revenue in the United States.
Hidden Gems and Shareholder Confidence
Beyond the blue-chips, investment managers are identifying significant value in the UK's small-cap sector. These companies, often described as undervalued "hidden gems," have suffered from weak sentiment and low investor inflows, pushing valuations to attractive lows.
Operating in niche fields like biotech and clean energy, these smaller firms can innovate rapidly and are frequently overlooked by analysts, creating opportunities for astute investors. Institutional interest is growing, evidenced by acquisitions like Carlsberg's purchase of Britvic in January and Thoma Bravo's takeover of Darktrace.
Furthermore, established UK companies are demonstrating confidence through aggressive share buyback programmes. Firms from Jet2 to HSBC are using this method to return excess cash to shareholders, which typically supports share prices.
Budget Boost for London Listings
The market received a significant policy boost in the recent Autumn Statement. Chancellor Rachel Reeves announced a three-year stamp duty holiday for new London listings. The Treasury's plan will remove the 0.5 per cent duty investors pay when buying shares in a company following its Initial Public Offering (IPO).
This move directly addresses long-standing calls from the City to scrap the tax, seen as a hurdle in competing with overseas financial centres that offer more favourable tax and regulatory regimes. The change aims to revitalise a market recovering from a severe IPO drought, where only £184m was raised in the first three quarters of 2025, compared to roughly £40bn in the US.
Combining greater political stability, exceptional value, and high-quality global businesses, the UK equity market is reshaping its narrative. For investors seeking diversification and opportunity beyond the AI-centric US rally, 2026 may well be the year for a strategic look at London.
