Will the UK inventory market be the one to again in 2025? Shares are nonetheless going low cost, say consultants – we get their picks

The UK remains cheap but shows signs of becoming liked – if still not loved – by investors as we head into 2025.

After 41 months in a row when they deserted UK markets with net outflows from stocks, we finally saw a net inflow in November. That has perked up some interest, even excitement, among pundits.

The Labour government won a decisive election victory last summer and the prospect of political stability for the next five years, and a growth agenda that includes a huge housebuilding programme, may also bode better for the economy.

That needs to be balanced against Sir Keir Starmer and Rachel Reeves’ shaky economic start, with a dose of pessimism and unpopular Budget dished out and getting blamed for a flatlining economy.

Below, finance experts look at how the FTSE indices have done versus global competitors in 2024 and what lies ahead for UK markets, come up with a hopeful prediction for the pound.

 And we asked our experts to pick some UK stocks worth watching next year.

Value and income-seeking contrarians might give the UK a closer look

The FTSE All-Share’s advance in 2024 matches last year’s progress but pales compared with the major gains achieved by the headline US indices, says AJ Bell investment director Russ Mould – see the table below.

‘That profit is supplemented by a dividend yield of 3.4 per cent, share buybacks and also mergers and acquisitions, so the total return from UK equities will still be in the low-double digit percentage range,’ he says.

Mould points out that this result handily beats inflation, government bond yields and returns on cash.

‘The takeover activity witnessed in the UK again hints that there is value to be found, especially as many deals have been done at a big premium,’ he says.

‘The poor comparisons with the US remain the stick with which the FTSE 100 is constantly beaten.

‘Whether the NASDAQ and S&P 500 will finally run out of puff in 2025 remains a matter of debate, but value and income-seeking contrarians could be forgiven for giving the UK a closer look, given consensus forecasts for earnings and dividend growth.’

Mould reckons the FTSE 100 could be at 9,000 by the end of 2025.

First net inflows into UK equities after 41 months of outflows

UK equities are at a pivotal moment that presents what could be a once in a generation opportunity, according to investment research company Edison Group.

They might still be trading at their steepest discount to global peers in over three decades, but November 2024 marked the first net inflows into UK equities after 41 consecutive months of outflows – signs of shifting investor sentiment and the UK market’s unique potential, says the firm.

UK equities trade at a 40 per cent valuation discount, and have a forward price/earnings ratio of 10.5x compared to the US market’s 26. And, as US market dominance hits 70 per cent of global indices, US-based funds are increasingly seeking diversification, it points out.

Edison says the UK markets currently offer significant appeal, and its equities could form the cornerstone of a balanced, forward-looking portfolio due to the following factors:

– The end of the zero interest-rate policy era and higher inflation favours the UK’s capital-intensive, cash-generative businesses;

– Corporate activity validates this trend, with merger and acquisition volumes up 81 per cent year-on-year;

– The Government’s pension reforms are set to further bolster the position;

– The growing prevalence of share buybacks, almost matching the US in activity;

– Projections the UK will be the G8’s third fastest-growing economy in 2025.

Edison highlights Renew Holdings, Rightmove, Card Factory, Gamma Communications, and ME Group International as standout and diverse opportunities.

‘UK equities are at a fascinating inflection point,’ says Neil Shah, executive director for content and strategy. ‘UK equities now represent a potential generational opportunity based on historically low valuations, improving economic fundamentals, pension reform, growing international interest, and increasing corporate activity validating valuations.

‘We recommend investors take a barbell approach, maintaining selected US exposure while building positions in UK equities, particularly in the small and mid-cap space where valuation disconnects are most extreme.’

World-class disruptive businesses are trading at table-thumping discounts

The UK has been considered a ‘favourite underweight’ for global investors for a long time, according to Mark Costar, senior manager of the JOHCM UK Growth and JOHCM UK Dynamic Strategies funds.

‘Brexit started off the bad news, but then we’ve had a revolving door of Prime Ministers,’ he says, but reckons greater stability is on the horizon.

‘We’ve retreated back to the centre, and the relative certainty that that may now yield going forward could prove beneficial for UK markets.

‘We keep coming back to the UK because there are world-class disruptive businesses here that have really strong structural growth optionality, but they’re trading at table-thumping discounts.’

Costar says international investors see the UK market as offering unique opportunities at attractive prices, and the changing regulatory landscape – for example, plans to build 1.5million new homes over the next five years – may help to accelerate growth.

‘These planning levers will help drive and accelerate growth in the UK,’ he notes, adding that the UK market remains ‘a tremendous hunting ground’ for mispriced stocks with strong growth potential.

What about the pound? Could it soar against the euro

Saxo Bank floats the idea of the pound erasing its post-Brexit discount versus the euro and rising through E1.27, the level it traded at ahead of the referendum, on its so-called ‘outrageous predictions’ list of 2025.

These are not Saxo’s official market forecasts, but are intended to remind investors to account for all possible outcomes, even those that appear unlikely.

Its other contenders for next year include Trump blowing up the US dollar, Nvidia ballooning to twice the value of Apple, the first bio-printed human heart ushering in new era of longevity, and a natural disaster bankrupting a large insurance company for the first time.

Regarding the chances of pound strength against the euro, it says: ‘The UK outlook is as constructive as ever in the post-Brexit era.

‘That is, it is the most positive relative to the sick man of Europe, which is, well…Europe, or at least the core Eurozone countries, France and Germany.’

Saxo goes on: ‘Fresh fiscal policy winds are blowing in the UK, where the new Labour government announced budget priorities ahead of 2025 that avoided the most growth-damaging types of tax hikes on income, while trimming the least productive public sector spending in moving to shrinking its deficits.’

It says the outcome of a rising pound could be domestic investment, a more robust growth outlook and the FTSE 100 posting a strong performance.

Stocks to watch in 2025

Russ Mould, investment director of AJ Bell, offer the following stock ideas for different investing goals, and identifies two potential takeover targets.

Cautious investors: Legal & General

Shares were down in 2024, ostensibly because investors seem sceptical that new chief executive António Simões can deliver on the medium-term targets he has laid down, according to Mould.

‘Management continues to target a compound annual growth rate for earnings of 6 per cent to 9 per cent across the four-year period from 2024 to 2027, as well as 20 per cent-plus returns on equity and the generation of between £5billion and £6billion in capital.

‘Even though the broader life insurance business remains fiercely competitive, and the investment management operation faces many challenges, these ambitions are underpinned by the company’s strong position in long-term growth markets, such as workplace pensions and bulk annuities.

‘The institutional retirement business contributed more to group profits in the first half of the year than the rest of the company combined.’

Mould says attaining the capital generation goal figure will enable the insurer to invest in its core business and return any surpluses to shareholders.

Meanwhile, analysts’ consensus forecasts for a dividend of 21.86p a share in 2025 equate to a dividend yield of more than 9 per cent, and there is scope for further share buybacks over and above the £200million programme completed this year.

Balanced investors: Diageo

‘Lockdowns and the pandemic fooled management and investors alike into thinking that the spirits business had entered a new era of faster growth in volumes and “premiumised” prices,’ says Mould.

‘Reality has since set in, thanks in part to the cost-of-living crisis, and Diageo’s share price has tumbled back to 2020 levels.’

But he notes that a 25-year streak of growth in the annual dividend is testament to the power of the drinks giant’s portfolio of brands, and if chief executive Debra Crew cannot do better an activist investor may look to do it for her.

Tariffs involving the EU, US and China are not helping sentiment toward the stock, with Beijing slapping new levies on European brandy in the autumn, and nor are problems with excess stock in Latin America, he says.

But growth in demand for premium spirits is returning to its long-term trajectory, and Diageo remains well-placed to capitalise upon that.

Mould adds that with demand for Guinness currently so potent, it would be no great shock if an investor agitated for the Irish brewing business to be hived off from the spirits brands.

Adventurous investors: C&C Group

‘The power of C&C’s drinks brands, such as Bulmer’s, Magners and Tennent’s, has been tested by rotten British weather, the cost-of-living crisis and also self-inflicted wounds.’ says Mould.

There was a ‘bungled’ software implementation and productivity programme at the Matthew Clark drinks distribution business, while accounts for the year to February 2024 were late and ‘a mess’ when they finally arrived, he explains.

‘The shares are no higher than they were in 2009, but that means it may not take too much to stir fresh interest in C&C, given how sentiment is already so depressed and expectations so low.’

‘C&C’s appointment of Roger White, formerly of AG Barr, as its new chief executive following the sudden departure of his predecessor in August, is a huge step for a company that has lots of scope for self-help.’

Mould says this could include investment in premium cider and beer brands, cost efficiencies in distribution, simplification of the group structure, and potentially reduced debt thanks to free cash flow or even disposals.

‘Leading shareholder Engine Capital has already publicly expressed its frustration with C&C’s poor performance record, and the company and investor have pledged to work together. In this respect, Mr White has a mandate for change and self-help could yet put some fizz back in the share price.’

Income seekers: Assura

The healthcare Real Estate Investment Trust can point to a record of 10 or more increases in its annual dividend, and its £3.1billion property portfolio looks more than capable of generating the rental income that funds investment in the business and dividends, according to Mould

He reckons shareholders can look forward to a yield of more than 8 per cent in 2025 if analysts’ consensus forecasts are accurate.

‘This year’s £500 million acquisition of 14 private hospitals in Canada has diversified the portfolio in terms of its geography and end-market exposure, even as the company continues toward completion on new site developments here in the UK.

“A new joint-venture with the Universities Superannuation Scheme will focus on assets let to the NHS and GPs in the UK, but increasing exposure to private healthcare to supplement its strong relationship with those groups makes sense.

‘More patients are turning to the private sector thanks to waiting lists and capacity constraints and arguments for shifting care into the community are gathering momentum. Overall, Assura owns more than 600 sites that serve more than six million patients.’

Mould concludes: ‘The share price represents a 22 per cent discount to the last stated net asset value per share of 49.4p, to provide an additional reason why the stock looks attractively valued, besides the dividend yield.’

Potential takeover target 1: ITV

Companies become credible takeover targets when the shares are both weak and cheap, and they have redeeming qualities that could interest a buyer taking a longer-term view, according to Mould.

‘ITV’s shares have languished in the doldrums amid a hangover from the Hollywood strikes which disrupted TV and film productions, as well as uneven advertising income.

‘Private equity, a rival broadcaster or even a streaming platform could show interest in ITV. Its Studios content arm is the hidden gem in the business, potentially worth more than the market value of the entire group.

‘Someone like Netflix could gobble up ITV for a fraction of its annual content spend and access its rich library of programmes.’

Mould adds that the ITVX platform is proving stronger than originally expected and providing valuable insight into customers and their viewing habits, which is the type of in-depth data that convinces big brands to advertise as they can target certain people efficiently.

Potential takeover target 2: B&M

‘Brothers Simon, Robin and Bobby Arora bought B&M 20 years ago as a struggling chain of 21 stores,’ says Mould.

‘They worked their magic and made B&M into a UK and French retail giant with more than 1,000 sites. It has been a disruptive force in discount retail and its roll-out opportunity still has legs.’

Simon Arora bowed out in 2022 after 17 years running the business, and Bobby Arora is preparing to leave in 2025, which is the end of an era and precisely the time when a bidder might fancy their chances of making an offer, he notes.

‘The shares have been weak because a poor first quarter was followed up by soft trading in the second quarter. The company recently lost its place in the FTSE 100 and investor sentiment is weak. It’s at times like this when a predator could pounce.’