There is still a lot of value available, according to Terry Tanaka, even though UK stocks are making a resurgence
UK stocks are enjoying a period of prosperity. Because of a widespread recovery in equity prices, the FTSE 100 recently reached an all-time high of 9,000. Stated differently, the rally was not solely propelled by a few exceptional performers. Indeed, a ten-year trend of US outperformance has been reversed as UK stocks have outperformed their US counterparts in the first half of the year. In local currency terms, the FTSE All-Share has yielded a total return of slightly more than 9% since the beginning of 2025. It generated a total return of 19 percent in US dollars, which was much higher than the SandP 500's 6 percent return.
According to data gathered by the massive wealth management firm Schroders, multiple expansiona byproduct of rising investor confidencehas been the primary driver of the outperformance rather than earnings growth. A ten percent increase in valuation and a two percent dividend return drove the UK's overall return over the first half, according to Schroders' calculations. But as analysts lowered growth projections due to global uncertainty (primarily over tariffs), earnings turned out to be a headwind, deducting 3% from returns.
UK stocks: a story of growth.
Market sentiment is very important, and in the UK, sentiment has significantly improved over the last six to twelve months, despite starting from a very low place. The UK has seen the most robust run of positive economic surprises among developed markets since January, despite appearances. Investor sentiment regarding growth appeared to be revived by the UK's trade-deal "hat trick" with the US, India, and the EU, according to the Citis Economic Surprise Index (again, from a very low base). Additionally, there is the interest rate tailwind. Throughout the rest of the year and into 2026, the markets are factoring in multiple rate reductions from the Bank of England. Reduced interest rates ought to help domestic cyclical stocks like builders' merchants, retailers, and home builders. As Labour's efforts to encourage investment in infrastructure and planning reforms begin to pay off, these rate-sensitive sectors should also gain.
Investors, especially those in the UK, are still fleeing in large numbers despite the markets' impressive performance thus far this year. Around 32 billion has left UK equity funds over the past 12 months, which is equal to 11.6 percent of the initial assets under management, according to equity fund flow data compiled by JPMorgan. Despite recent market highs, outflows have been increasing over the past few months, suggesting that investors are selling into the rally.
On a top-down level, UK stocks are a growth story, which may surprise you. Earnings per share in the FTSE 100 are expected to increase by 11.5 percent in 2025, according to JPMorgan estimates, before declining to 2.5 percent in 2026. In contrast, Schroders Intelligence aims to increase its earnings per share by 3% this year and 12% in 2026. That represents expected earnings growth in the mid-teens over the next two years, regardless of perspective. By that measure, the average forward price-earnings (p/e) ratio of the FTSE 100 is 12. JPMorgan states that "this represents a substantial discount compared with the US market and a 10 percent to 15 percent discount to their 15-year medians."
If you look more closely, the valuation becomes even more convincing. "With earnings predicted to grow at a rate of about 15% annually, UK mid-caps are trading at 12 times expected 2025 earnings, suggesting potential good value (a p/e ratio below the growth rate)." If domestic growth continues, a re-rating may occur," the investment bank continues.
Key dangers to avoid with UK stocks.
Purchasing UK stocks has many benefits, but there are also many risks to take into account. Domestic stocks are given preference over foreign exporters, as JPMorgan makes clear. Since industrial energy prices in the UK have risen to the highest levels in the developed world over the last four years, most producers find it challenging to compete with their foreign counterparts. As such, a sizable chunk of the industrial base in the UK has disappeared. There is no indication that this environment will change anytime soon.
Political meddling, high capital expenditure needs, and generally subpar return profiles make utilities appear risky as well. Avoid debt-ridden consumer stocks as well, as they will be negatively impacted if wage growth slows down. The possibility of additional tax increases is the main lingering risk for UK stocks. In the fall budget, the Labour government has been suggesting a number of possible tax increases. More taxes are practically a given given the nation's failing finances and the total lack of political will to reduce spending. Corporate activity and consumer spending will be impacted by higher taxes. Given that the most recent round of tax increases damaged company confidence and limited hiring, investors should take this risk into account.
A flurry of takeover offers has already resulted from the valuation of UK stocks in comparison to their global counterparts. Foreign investors are grabbing the chance to jump in as UK investors are running away. Private equity is taking advantage of this value. The topic of real estate investment trusts, or Reits, has gained attention. This year, Assura, Urban Logistics, Care Reit, and Warehouse Reit were all purchased. Because of a curious anomaly in the stamp duty law, buying real estate through a company structure is frequently less expensive than buying it directly. Stamp duty is only 0.5 percent on shares, but it can reach the mid-teens for corporate entities purchasing specific kinds of real estate. Acquirers thus benefit from lower taxes and the chance to buy real estate at a lower price than the market. As of early June, over 30 bids had been made for businesses valued at over £100 million, with an average premium of 45% across all industries.
Other than the real estate industry, quality UK mid-caps and small-caps are appealing because they have global revenue footprints and trade at historically large discounts to their US counterparts. Although the value of banks' shares has increased to levels not seen since before the financial crisis, they still offer dividend yields in the mid-single digits, with additional capital returns likely as profits continue to grow.
Buy quality stocks in the UK.
So, where can investors find value? Quality is crucial, as always. A Panmure Liberum report titled "Accounting red flags: high-quality stocks lead" presented an intriguing investigation on this subject at the start of July. The study intends to assist investors in identifying high-quality stocks, avoiding company failures, and increasing returns by drawing on scholarly research and machine-learning applications. The three primary areas of focus for the framework are governance oversight, audit risk, and accounting quality. Businesses were divided into baskets designated for the top 30 percent (highest accounting quality) and the bottom 30 percent (lowest accounting quality); financial and real estate firms were not included because of leverage-related problems. The study discovered that the UK's top 30% quality basket outperformed the bottom 30% by an average of 9% over the previous five years (ending June 2025).
The analysts created a shortlist of UK stocks that they felt satisfied all of their requirements for businesses with the highest caliber of accounts after examining the data from reports from 2024. The companies on the list include Mitchells & Butlers, National Grid, Halma, Games Workshop Group, BT Group, DCC, Associated British Foods, and J. Sainsbury, Whitbread, Taylor Wimpey, and SSE.
UK stocks: potential leaders in healthcare.
In the UK, Panmure Liberum has also ventured into the healthcare industry. The UK economy is strong in the fields of pharmaceuticals, healthcare, and biotechnology. With the aging of the population, improvements in medical technology, and rising wealth, they are among the industries with the biggest potential for growth worldwide. Located in the sweet spot of UK value, Advanced Medical Solutions (LSE: AMS) is one of Panmure Liberum's favorite plays. The company's "medtech" product line, which focuses on the surgical and wound-care markets, was primarily created internally. From 2010 to mid-2018, it was a small-cap champion with a return of over 1,000 percent. The stock has lost about 30% in the last five years, though, as the company has had difficulty growing into its valuation. Nevertheless, Panmure believes that this is the "best rerating story" in the medical technology industry and sees it as "most obviously oversold" in comparison to previous ratings. The company has hampered growth in the US market over the last five years by making a number of strategic errors. A recent acquisition that has been difficult to understand has also alarmed investors. Private equity, however, is waiting in the wings while the market finds it difficult to comprehend the business. Montagu's recent approach raised awareness of the company among investors but did not result in an offer. According to Panmure, a reasonable price for the business would be between 300 and 350p.
Additionally, the investment bank believes Genus (LSE: GNS), an animal genetics company, is significantly undervalued. Using advanced science and technology, such as gene editing and genomics selection, to improve animal breeding is the company's area of expertise. For instance, Genus' product to give pigs resistance to porcine reproductive and respiratory syndrome (PRRS), a disease that affects farmers all over the world, was approved by US regulators in April. One "hugely significant landmark" that is anticipated to result in approvals in other jurisdictions was this one. Even though this treatment alone might be worth over 1,000p per share, the company's share price hasn't yet reflected much of the growth.
CVS Group is a wild card (LSE: CVSG). In May 2024, the UK regulator announced an investigation into pricing and market practices, which caused investors to dump shares in the group, which owns veterinary practices nationwide. The stock has recovered as investors have reassessed their holdings, and Panmure anticipates more growth. The regulators' working paper on remedies was described as "relatively benign" in this passage. September 2025 is when preliminary results are anticipated, and by January or February 2026, final recommendations. Analysts estimate that the stock may be worth 1,600p based on historical profit multiples if the investigation's findings are as anticipated.
Mid-cap stocks in the UK.
Based on their potential for growth, Berenberg has also highlighted some of the most alluring names in the UK mid-cap market. Currys (LSE: CURY), an electronics retailer, and Genus are on their list. The company reported a 37% increase in adjusted profit before taxes at the start of the month, along with the return of cash dividends. At the end of the year, the group's cash balance increased to 180 million net. Nevertheless, the stock is currently trading at a forward price/earnings ratio below ten, which appears to ignore the company's potential for growth. The investment banks' list of undervalued growth plays also includes two specialized mid-cap lenders, OSB Group (LSE: OSB) and Paragon Banking (LSE: PAG). The latter is trading on 7.1 times forward earnings, while the former is trading on a p/e of 4point 8. Despite bad press, the buy-to-let lending market is still expanding, and both have established a niche in it. In the first half of its fiscal year, Paragon recorded a 25 percent increase in new buy-to-let lending, fueled by rising landlord demand, the company said in early June. Internal problems have also plagued OSB in recent years, but they appear to be behind the company now. According to a recent note from Panmure, a number of updates showing that the company is producing results in the near future will "help restore confidence."
The following mid-cap companies are also on Berenberg's radar; they are all trading at a price/e ratio of ten or less: Kier Group (LSE: KIE), ITV (LSE: ITV), Mitie (LSE: MTO), Pets at Home (LSE: PETS), and IG Group (LSE: IGG). ITV is more of a breakup/takeover play, while Kier and Mitie, in particular, are plays on the UK government's soaring spending bill. With a strong and expanding presence in international financial markets, IG is a real global champion based in the UK with a significant growth runway ahead. Babcock International is one company that frequently appears on "best-buy" lists published by the leading brokers in the city (LSE: BAB). As the Labour government has reaffirmed its commitment to UK defense spending, the shares of the defence company, which is one of the main contractors for the country's nuclear deterrent, have more than doubled in value in the last year. Only ten and four times forward earnings was the discounted multiple at which the shares began the year. Currently, they are more like 20 times, which is somewhat costly. However, since defense is a stable, long-term industry, Babcock should be valued higher. With a dividend yield of 4.2 percent, JPMorgan's earnings are expected to grow by 64 percent in 2025 and then by 8 percent in 2026.
4imprint Group (LSE: FOUR) is Barclays' preferred mid-cap. The company, which manufactures promotional goods, has a 99 percent Barclays "quality" rating and possible upside of 68 percent to the 5,500p price target, making it one of the top investment banks' picks in Europe. Strong net cash balance (148 million at the end of 2024), free cash flow (estimated at 103 million for 2025), and return on capital employed (77.7 percent in 2024) are indicators of the quality of the business. With a prospective dividend yield of 5.1 percent, the stock is currently trading at an undemanding forward price/earnings ratio of 12.7.
Best of the best: UK stocks.
4imprint appears to be one of the City's best choices, but there are many London-listed mid-caps that appear appealing at current valuations, but which ones actually merit a spot in your portfolio? The company is one of the few with net cash on the balance sheet and is ranked as one of Barclays' top plays in Europe. The "highly cash-generative model and low appetite" for mergers and acquisitions, according to Berenberg, indicates that there is "room for increased returns to shareholders through special dividends or buybacks." Additionally, it believes that there is a lot of room for the group to increase its profit margins through general growth and economies of scale.
Another company that has the City's full support is Genus.
The stock has been marked as a "buy" by Deutsche Bank, Berenberg, and Panmure due to the recent regulatory approval in the United States and the increasing demand for animal proteins. Babcock also has a sizable fan base. What's most exciting are those lengthy contract lead times. According to Berenberg, "Given the substantial pipeline of domestic and international defense contract opportunities and the strong momentum demonstrated by the 11 percent average annual organic revenue growth achieved in the last three years, we believe that revenue guidance is conservative."
One undervalued recovery play in the real estate market is NewRiver REIT (LSE: NRR). Owning shopping malls and retail parks, NewRiver has had a difficult few years, but things are beginning to get better. The Panmure Liberums property team observes that the NewRivers portfolio is ideally positioned to profit from the normalization of investor sentiment "and the hunt for high, stable income," since rents are still reasonable and asset values are close to cyclical lows. As bidders circle the sector, the company is trading at a 36 percent discount to the value of its net assets, making the 91% dividend yield fully covered.
The owner of Premier Food (LSE: PFD), Mr. Kipling, comes last. This business has grown over the last five years, rising from the ashes like a phoenix. The group was overleveraged, struggling to control an inflated cost base, and saddled with heavy pension obligations after the pandemic. Costs quickly decreased, but debt and pensions continued to be a problem. Over the last three years, it has been able to make progress on the debt and draw a line under the pension issues. The money was used to reinstate the dividend, reinvest in the company, and now search for acquisition opportunities. After a few successful years, analysts didn't anticipate much excitement this year. They erred. Management reiterated profit projections for the year after a recent trading update exceeded low expectations. Developments in new products and recent acquisitions will propel growth. The stock is recommended by analysts at Berenberg and Shore Capital. In contrast to the peer group average of 17, it trades on a forward p/e of 13.
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