Sandrine Soubeyran
This insight is a follow-up to a previous note in February, where we highlighted the relative value and opportunities of the UK equity market.
- The UK equity market continues to show its resilience amid an increasingly complex geopolitical and economic landscape.
- The FTSE 100 remains well-suited to those seeking stability and yield, while the FTSE 250 may appeal to investors wanting exposure to the domestic recovery.
- Recent rotation into FTSE 250, from FTSE 100, shows investors gaining increasing confidence in the recovery of the UK economy.
The UK equity market continues to show its resilience amid an increasingly complex geopolitical and economic landscape. Over twelve months, the FTSE 100 Index has returned nearly 20%, outperforming the US (~12%) and the World ex US (~16%) equity markets, all in US dollar terms.
Its heavy exposure to defensive sectors, like Financials and Consumer Staples, which account for nearly 41% of the market, has shielded the UK equity market from weak economic growth and allowed it to benefit from a global rotation into value stocks.
Source: FTSE Russell, June 13, 2025. Total Returns, in USD terms. Past performance is no guarantee to future results. FTSE All World series. Please see the end for important legal disclosures.
Revival of the UK domestic market
The FTSE 100, home to large-cap, globally diversified companies, has also outperformed smaller UK companies over the year. Accordingly, the FTSE 100 has risen by 12% in sterling terms, compared to about 9% for the mid and small-cap UK indices (see left Chart).
However, the last three months have seen another notable change. Investors have not only sought exposure to larger UK companies but are also embracing the broader UK equity market. The FTSE 250, often regarded as a barometer for the UK’s economic health, represents companies, which are lower down in the capitalisation levels compared to the FTSE 100. Stronger than expected UK economic growth in Q1 (though there was a tariff effect in March and a much softer month of April), underpinned by easing inflation and lower interest rates, has rekindled interest for domestically oriented companies.
This has resulted in a reversal in market leadership and the outperformance of the FTSE 250 and FTSE SmallCap (up by about 9%) relative to the FTSE 100, which has returned 5% during the same period (see right Chart).
Source: FTSE Russell, June 2025. Total Returns, in GBP terms. Past performance is no guarantee to future results. Please see the end for important legal disclosures.
Recent UK fund flows privilege UK equities and UK smaller companies over GBP bonds
The deepening interest for UK smaller companies is also evident in the recent Lipper fund flows. Investors have switched out of sterling bond funds, notably GBP government bond funds, into UK equity funds since ‘Liberation Day’ in early April, including a more recent rotation into UK smaller and mid-cap equity markets.
Source: Lipper, LSEG, June 2025. Past performance is no guarantee of future returns. Please see the end for important legal disclosures.
Financials drive the performance of FTSE 100 and FTSE 250 over 3M
Breaking down the return contribution by sectors shows the FTSE 100 and FTSE 250 Financials, Industrials and Consumer Staples providing high contribution to performance over the last three months. But the higher weight of Financials in FTSE 250 (45%) largely explains the mid-cap index outperformance relative to the FTSE 100 (25%). The Industrial weight is also slightly larger in the FTSE 250 versus FTSE 100. Moreover, the underperformance of healthcare weighed on the FTSE 100, which has a higher weight in pharmaceuticals.
Source: FTSE Russell, June 2025, sterling terms. Past performance is no guarantee to future results. Please see the end for important legal disclosures.
Geographic revenue exposure exposes the domestic slant of the FTSE 250
The geographic revenue exposure of UK-listed companies highlights sharp differences between the FTSE 100 and FTSE 250. The FTSE 100 derives nearly 30% of its revenue from the United States, far outstripping contributions from other regions such as Japan and China. This underscores the critical role of the US economy in driving earnings for UK-listed companies. The geographic revenue exposure for the FTSE 250, unsurprisingly, shows much more dependence on the domestic economy, with 43% of its revenue exposure coming from the UK. Although considerably lower than firms in the FTSE 100, FTSE 250 companies still derive 10% of their revenues from the United States, even if the overseas exposure is more modest than for FTSE 100 companies.
Source: FTSE Russell and Factset. Past performance is no guarantee to future results. Please see the end for important legal disclosures.
Overall, the UK market offers a blend of defensive characteristics and income appeal. The FTSE 100 remains well-suited to those seeking stability and yield, while the FTSE 250 may appeal to investors wanting exposure to a domestic recovery. In an era of heightened uncertainty, balancing exposure to UK equities with global diversification with those with a domestic slant could provide some interesting long-term opportunities.
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