Key Takeaways
- UK stocks are expected to rise to new levels, with falling interest rates boosting mid-cap stocks such as housebuilders.
- One Gold-rated investment trust manager has increased his exposure to the UK in recent years.
- But some fund houses are cautious on UK economic growth in 2026.
The FTSE 100 has hit multiple record highs in 2025, thanks to the performance of the largest companies, including HSBC HSBA, AstraZeneca AZN, and Rolls-Royce RR. And the broader Morningstar UK Index has also hit new highs, outpacing global markets. With moderating inflation and interest rates expected to fall in 2026—and the Autumn Budget now out of the way for another year—many UK equity managers are expecting the rally to continue into the new year.
A survey by the Association of Investment Companies found that two thirds of investment trust managers believe the FTSE 100 index will climb above 10,000 points in 2026, compared with 24% who believe it will remain at its current level, between 9,000 and 10,000. A more pessimistic 10% think the index will fall below 9,000, a level the FTSE 100 breached for the first time in 2025.
Job Curtis, manager of the Morningstar Gold-rated investment trust City of London CTY, has increased his exposure to the UK and lowered his overseas exposure from 17% in 2022 to 7% this year. The majority of the trust’s assets are invested in the UK and it uses the FTSE All-Share as its benchmark. However, the trust’s mandate allows Curtis to invest up to 20% overseas.
Speaking at an AIC roundtable in December, Curtis said the decision has been driven by the relatively attractive valuations of UK equities. He also sees the Bank of England’s recent decision to lower capital requirements for banks as a pivotal moment for financials, which are a key sector of the UK stock market. HSBC is the largest holding in the investment trust with a weighting of just over 5%.
Mid-Cap Growth Could Drive FTSE 250 Higher
Some managers, such as Rebecca Maclean, comanager of Dunedin Income Growth Investment Trust, see the mid-cap stocks represented in the FTSE 250 index as a key driver of overall market growth next year.
Alexandra Jackson, manager of Rathbone UK Opportunities, says the conditions are right to drive the FTSE 250 higher in 2026. In an environment where interest rates are coming down, the more cyclical mid-cap index has historically outperformed the FTSE 100, she says. With rate cuts lowering companies’ borrowing costs, mid-caps could see stronger earnings growth, she adds.
One other advantage is of mid-cap stocks is their relative valuations versus large-cap stocks in a year in which the FTSE 100’s large-cap stocks have outperformed.
“Valuations remain significantly depressed versus long run averages and other comparable markets. We believe there is a broad-based valuation reversion opportunity for UK equities, particularly small and micro-caps, albeit the timing and magnitude is difficult to predict,” Natalie Bell, fund manager on the Liontrust Economic Advantage team.
UK Earnings Season Will Be Key
Ben Russon, co-head UK equities and portfolio manager at ClearBridge Investments, also backs small- and mid-caps for the next year, and is “extremely optimistic” on earnings per share growth.
“Over the past couple of years, the UK market has become hypersensitive to any earnings misses, with negative market swings on the back of profit warnings often proving to be significantly larger than the accompanying earnings downgrade. Realistic company guidance should help limit some of these market moves and may also aid the positive sentiment to UK markets through increased confidence in corporate forecasts,” he says.
Even companies which only just meet earnings expectations could thrive, according to Abby Glennie, manager of Aberdeen UK Smaller Companies Growth Trust AUSC, which has a Morningstar Medalist Rating of Bronze.
“If UK small and midcaps can deliver on forecast earnings growth, even without a re-rating from today’s cheap base, the return potential looks rewarding.”
What Lower Interest Rates Could Mean for UK Stocks
Glennie adds that valuations in the property sector could rise if rates fall in 2026. She says: “Builders such as Persimmon, Barratt Redrow, and Taylor Wimpey are all trading at attractive levels, and any reduction in interest rates should act as a meaningful tailwind.”
Inflation is expected to fall from its current level of 3.8% into 2026, leading to further base rate cuts by the Bank of England. This will lower borrowing costs for companies and consumers taking out mortgages. Industry experts have cited the cost of taking out home loans as a headwind for the housing sector, which is pivotal to consumer sentiment in the UK.
Interest rates are currently at 4% and are expected to be cut to 3.75% on Dec. 18. Futures markets currently point to April 2026 as the most likely month for the next rate cut. While UK interest rates have fallen from a recent peak of 5.25% to 4%, the Bank of England has been more slow to cut borrowing costs than the European Central Bank, which cut key deposit rates to 2% this year.
The Fund Managers Less Keen on the UK
Not all fund houses are bullish about the UK though. While fears over the stock market impact of the Autumn Budget have subsided, economic growth is still expected to be subdued in 2026. The official UK fiscal watchdog, the Office for Budget Responsibility, has lowered its growth forecast from 1.9% to 1.4%.
Bank of America expects UK economic growth of between 1.2% and 1.4%, with inflation falling to near 2%, and a terminal Bank of England rate of 3.25% with cuts in December 2025, and March and June next year.
European asset managers Amundi and ING both expect to see slow growth in the UK in 2026, despite lower inflation and rate cuts. After a year of political and bond market instability, ING says politics is the biggest risk for UK markets in 2026, while Amundi expects UK growth to remain below its potential in 2026 but to recover in 2027.
Both HSBC Private Bank and BlackRock have a neutral stance on UK equities. BlackRock’s outlook says: “Valuations remain attractive relative to the US, but we see few near-term catalysts to trigger a shift.”
