The UK has world-class businesses trading at huge discounts, while the regulatory landscape is changing, which may help to accelerate growth.

For a long time, the UK has been considered a ‘favourite underweight’ for global investors. This can be attributed to the turbulent political climate that began with Brexit, which led to years of uncertainty, changing leadership and lack of investor confidence. Brexit started off the bad news, then a revolving door of prime ministers has helped contribute to the UK being seen as undesirable for investment.

However, the UK may now be emerging from this period of political volatility, with greater stability on the horizon. The UK has retreated back to the centre. The relative certainty that creates for the future could prove beneficial for UK markets.

Additionally, political pressure could lead to policy changes that encourage more investment in UK markets. One key issue is the low allocation of UK pension funds to domestic equities, which has declined significantly in recent years due to de-risking strategies. This trend could soon reverse if policymakers take action to encourage greater pension fund investment in UK assets.

One of the most striking characteristics of the UK public markets in recent years has been the significant undervaluation of UK companies. There has also been a growing wave of mergers and acquisitions activity targeting UK firms. We have seen 45 companies leave the UK market in 2024, the highest in 15 years, and there have been bids for £160bn ($200bn) of our market cap.

The undervaluation of UK stocks, combined with generally strong operating performance, is driving this surge in takeover activity. The UK has world-class disruptive businesses that have really strong structural growth optionality and they’re trading at table-thumping discounts.

Hidden value

The rampant M&A activity has also spurred concerns within UK boardrooms, as many companies fear they will be acquired at undervalued prices. Boardroom discussions often and increasingly lead to considerations around share buybacks, capital allocation and other strategies to release hidden value within the company. There is a palpable fear that companies will be taken over cheaply, which is leading to proactive measures by management teams to fend off potential bids.

Amid these challenges, the UK government is placing significant emphasis on infrastructure development, which could offer much-needed support for the economy. Over the next five years, the government has committed to investing more than £320bn in infrastructure. This spending, focused on projects that have a multiplier effect on the economy, could significantly boost growth and provide opportunities for private sector investment.

The regulatory landscape is also changing, which may help to accelerate growth. The UK has long been burdened by onerous planning regulations, which have stifled development in areas like housing and energy infrastructure. However, there is hope to be found in recent efforts to reform these regulations. For example, the UK government is planning to build 1.5m new homes over the next five years, a significant increase from historical levels. These planning levers will help drive and accelerate growth in the UK.

The outlook for the UK public markets in 2025 is cautiously optimistic. Valuations are flashing green, with many UK stocks trading at deep discounts compared to their US peers, presenting significant opportunities. Additionally, corporate news flow has been positive, alongside rising earnings, cash flows, and dividends, which all contribute to investor confidence. The UK market is a tremendous hunting ground for finding mispriced stocks with strong growth potential. With these favourable conditions, the UK market is well-positioned to keep recovering in 2025.

Mark Costar is senior fund manager of the JOHCM UK Dynamic Fund (left) and James Lowen is senior fund manager of the JOHCM UK Equity Income Fund