UK Equity Market Guide: FTSE 100, Valuation, and the Case for UK Equities

The UK equity market has been unloved by international investors for much of the period since the 2016 Brexit referendum. Merger and acquisition activity, dual listings in New York, and large companies restructuring away from the London Stock Exchange have dominated headlines. And yet the fundamental case for UK equities in 2026 deserves serious examination: the FTSE 100 trades at historically wide discounts to global indices, offers one of the highest equity dividend yields of any developed market, and earns the vast majority of its revenues overseas — making it far less dependent on the UK domestic economy than its "UK" branding implies.

FTSE 100 Composition: What You Actually Own

The FTSE 100 tracks the 100 largest companies by market capitalisation listed on the London Stock Exchange. Its composition is distinctive compared to almost every other major global equity index.

Sector weights (approximate, early 2026):

• Energy (~18–20%): Shell, BP — two of the world's largest oil and gas companies.
• Financials (~17–18%): HSBC, Barclays, Lloyds, Standard Chartered, Legal & General, Prudential.
• Consumer staples (~14–15%): Unilever, Diageo, British American Tobacco, Imperial Brands.
• Healthcare (~10–12%): AstraZeneca, GSK, Haleon.
• Mining/Materials (~10%): Rio Tinto, Anglo American, Glencore, Antofagasta. (BHP unified its structure and left the FTSE 100 in 2022, retaining only a standard London listing.)
• Industrials (~7%): BAE Systems, Rolls-Royce, Ferguson.
• Technology (~3–4%): Sage Group, with limited other constituents (AVEVA, formerly a major name, was acquired by Schneider Electric and delisted in 2023) — negligible tech representation.

The striking feature is what is absent: there are no major software companies, no platform businesses, no AI infrastructure plays of the scale found in the US or, to a lesser extent, Europe. The FTSE 100 is an index of "old economy" global businesses — commodities, banks, tobacco, consumer goods, and energy. This sector composition partially explains the valuation discount; it is not purely a UK-specific discount but also reflects the mix of industries.

The Valuation Discount

The FTSE 100 typically trades at 10–12× forward earnings as of early 2026, against:

• MSCI World: ~18× forward earnings
• S&P 500: ~20× forward earnings
• Euro Stoxx 50: ~13–14× forward earnings

On a price-to-book basis, the FTSE 100 trades at approximately 1.5–1.8× versus 4–5× for the S&P 500.

The discount has widened since 2016. Explanations fall into two categories:

Structural reasons (discount may be permanent or persistent):

• Sector mix heavily weighted to low-multiple industries (banks, mining, energy, tobacco).
• Lack of technology exposure means the multiple cannot converge with tech-heavy US indices.
• Some UK-listed companies (particularly in energy and resources) have genuinely lower growth prospects than US tech peers.

Cyclical and sentiment reasons (discount may narrow):

• Brexit uncertainty suppressed valuations for several years; political situation is more stable now.
• UK corporate governance reform and renewed M&A activity in London.
• Global investors simply underweight the UK, and re-weighting — even partially — would provide price support.
• Activist investors and global buyout firms have noted the cheap valuations; M&A activity has been elevated.

The debate about whether the discount is justified is genuinely unresolved. Investors should form their own view rather than assuming reversion to historical norms.

The FTSE 250: A Different Animal

The FTSE 250 — the next 250 largest London-listed companies — has a very different character from the FTSE 100. While the FTSE 100 earns approximately 75% of its revenues overseas, the FTSE 250 is far more domestically oriented, with more exposure to UK consumer spending, commercial property, leisure, and financial services aimed at UK households.

The FTSE 250 therefore provides a better proxy for the UK domestic economy. It tends to:

• Outperform the FTSE 100 when the UK economy is growing and sterling is strong.
• Underperform when economic conditions are weak or sterling falls (the FTSE 100's overseas revenues are worth more in sterling when the pound is weak).
• Trade at a somewhat lower valuation discount to global markets because it contains more domestically oriented businesses with clearer ties to UK GDP growth.

For investors who want "UK" exposure in the economic sense — domestic consumer spending, UK house prices, UK financial services — the FTSE 250 is more appropriate. For those who want cheap, internationally diversified businesses listed in London with a high dividend yield, the FTSE 100 is the more relevant index.

The FTSE All-Share (all FTSE 100 + FTSE 250 + Small Cap companies) provides the broadest representation of the UK listed market.

The Overseas Revenue Story

One of the most misunderstood aspects of the FTSE 100 is how little its performance relates to the UK economy. Approximately 75% of FTSE 100 revenues originate overseas — in the US, Asia, emerging markets, and Latin America. Shell drills in the Gulf of Mexico and the North Sea. HSBC earns the majority of its profits in Asia. AstraZeneca sells medicines globally. Rio Tinto mines iron ore in Australia.

This has two important implications:

1. Sterling weakness is generally positive for FTSE 100 valuations. When the pound falls, the sterling value of overseas earnings rises. This is one reason the FTSE 100 often rallies when sterling weakens — counterintuitive to those who think of it as a UK index.

2. UK domestic economic conditions have limited relevance to the earnings of most FTSE 100 companies. An investor buying the FTSE 100 is primarily buying a diversified basket of global businesses that happen to be listed in London.

UK Dividend Culture

The FTSE 100 has historically offered one of the highest dividend yields of any developed market index. As of early 2026, the trailing dividend yield on the FTSE 100 is approximately 3.5–4.0%. This compares to:

• S&P 500: ~1.3–1.5% yield
• MSCI Europe ex-UK: ~3.0–3.3% yield
• MSCI World: ~1.8–2.0% yield

UK companies have a strong culture of maintaining and growing dividends, and dividend coverage ratios (earnings relative to dividends) have improved following Covid-era cuts and subsequent recovery. The high yield reflects both the sector mix (oil, tobacco, and banks are structurally high yielders) and the valuation discount (a fixed dividend on a cheap stock produces a high yield).

For income-oriented investors, the FTSE 100 offers an attractive combination of high current yield and dividend growth history. However, income investors should monitor dividend coverage carefully — particularly in energy (commodity-price dependent) and banking (regulatory capital constraints).

Tax Context for UK Investors

UK resident investors benefit from specific reliefs when holding UK equities:

• ISA: UK dividends are tax-free within an ISA; capital gains are exempt. No US-style withholding tax issue.
• SIPP: Dividends received gross; no tax until withdrawal.
• General account: UK dividends taxed at 8.75% (basic rate), 33.75% (higher rate), or 39.35% (additional rate) beyond the annual dividend allowance (£500 for 2026/27). Capital gains taxed at 18%/24% (post-October 2024 Budget changes).

Unlike US equities, there is no withholding tax issue on UK dividends for UK residents. This makes UK equities particularly efficient in ISA and SIPP wrappers.

ETF Options

UK large-cap:

• iShares Core FTSE 100 UCITS ETF (ISF): TER 0.07%. One of the cheapest UK equity ETFs; tracks the FTSE 100; available in distributing form to pass through the high yield.
• HSBC FTSE 100 UCITS ETF (HUKX): TER 0.07%.
• Vanguard FTSE 100 UCITS ETF (VUKE): TER 0.09%.

Broader UK market:

• HSBC FTSE All Share Index Fund: TER 0.06%. Covers the full UK market, including mid and small caps. Recommended for investors wanting diversified UK exposure rather than purely large-cap.
• Vanguard FTSE UK All Share Index Unit Trust: TER 0.06%.
• Vanguard FTSE All-World UCITS ETF (VWRL/VWRP) and the iShares MSCI ACWI UCITS ETF (SSAC) both include UK exposure within a global allocation.

For income-oriented investors, distributing share classes (those that pay out dividends rather than reinvesting) are relevant for the FTSE 100's above-average yield. Accumulating share classes are preferable for long-term growth investors who do not need current income.

Active Management in UK Equities

UK equity active management has a mixed record. Large-cap UK active funds have generally struggled to outperform a simple FTSE All-Share tracker after fees, consistent with the efficient market hypothesis. However, UK mid and small-cap active managers have shown more persistent ability to add value, given the broader opportunity set and less intensive analyst coverage.

Notable active managers:

• Liontrust Special Situations: Quality growth focus; one of the most consistently cited UK active funds.
• Man GLG Undervalued Assets: Value-oriented, mid-cap focused.
• Threadneedle UK Extended Alpha: Uses long/short structure within UK equities.

Risks to Consider

• Structural underperformance risk: If global markets continue to be driven by US technology, the FTSE 100's sector mix will continue to lag on a relative basis.
• Sterling risk: A UK investor's FTSE 100 holding is naturally in sterling; there is no currency diversification unless the overseas revenues provide a natural offset.
• Commodity price sensitivity: 25–30% of the FTSE 100 is in energy and mining; falling oil or metal prices can materially affect the index.
• Tobacco regulatory risk: Major dividend payers (BAT, Imperial Brands) face long-term demand decline and regulatory headwinds.
• Bank credit risk: Lloyds, Barclays, HSBC face domestic credit cycle exposure and ongoing PPI/conduct remediation.

All investments carry the risk of capital loss. Dividend income is not guaranteed and can be cut. Past performance is not a reliable guide to future results. Tax treatment depends on individual circumstances and may change. This guide is for information only and does not constitute financial advice.

How Global Investments Can Help

Global Investments assists HNW clients in assessing the appropriate role for UK equities within a globally diversified portfolio. We can help you evaluate the valuation case, structure efficient tax wrappers, and choose between passive and active approaches in different market segments. For clients re-evaluating their UK home bias or seeking to diversify internationally, we provide holistic portfolio construction services. Contact us to discuss your objectives.