Crucially, UK equity markets have repeatedly shown resilience in the face of shocks, from geopolitical tensions to tariff deadlines. Inflation, while sticky, looks unlikely to return to pandemic-era inflation levels of 7-10%. CPI was 3.8% in August, unchanged from July and the market appears comfortable with it in the 3-3.5% range. If inflation climbs towards 5%, or stagflation emerges, a reassessment of small-cap exposure would be wise, but for now, resilience looks more likely than vulnerability.
Other supportive factors include consistent rate cuts, cheap valuations and ongoing M&A activity. REITs for example, are performing well, offering attractive income options.
Institutional investors are already recognising these opportunities, especially with rate cuts likely. With so much capital sitting in retail cash savings, government measures to encourage greater domestic retail investment participation could provide a further boost.
Budget implications
Labour’s first year in government hasn’t been easy. Politically, there has been little appetite for welfare reform, while tax rises have complicated relations with business.
The decision to schedule the Budget in late November, rather than the usual October, signals the scale of the challenge. However, commitments like defence spending, which are valuable for UK manufacturers, look set to remain intact.
On corporate taxation, leaks to the press suggest a profit levy on gambling companies may be in the offing, which seems politically a relatively safe option. Another option rumoured to be under discussion is a levy on banks, capitalising on their strong profits. The combination of the sector’s strength and the public’s distrust of banks could make it an easy target.
Delivering on promises to cut red tape in housebuilding would be a positive step. Faster approvals for example, would provide a welcome boost to listed builders and to growth more broadly.
During his state visit to the UK, US President Donald Trump said he saw a great partnership between the two countries. Dubbed the “Tech Prosperity Deal” an additional £150bn of investment into technology has been agreed furthering the economic ties between both nations. This level of investment should be good for job creation, and filter into the broader UK economy, helping stimulate growth and consumption.
The road ahead
However, risks remain. Increased UK inflation or the emergence of stagflation could undermine the resilience UK equities have shown so far. Business tax rises could also impact growth and the UK’s investment prospects.
But opportunities also stand out. For income seekers, shorter dated gilts and investment grade credit, which are less interest rate sensitive, continue to offer attractive yields. Meanwhile, the market has priced in as many as six US rate cuts, meaning a US Treasury rally could provide valuable downside protection.
Overall, with a diversified and defensive strategy, the outlook for the UK remains strong.
This article is intended for regulated financial advisers and investment professionals only. Copia does not provide financial advice. This information is not intended as financial advice and should not be interpreted as such.
24th September 2025
The outlook for the UK
Richard Warne, Senior Portfolio Manager, Copia Capital
The recent rise in 30-year gilt yields has received a lot of interest. With this long-dated government debt reaching a 27-year high at 5.7% (3rd September 2025), investors are naturally questioning the implications for the UK. It could heavily influence how Rachel Reeves manoeuvres within the limited fiscal headroom available in her (more winter than) Autumn Budget.
Yet despite these pressures, there are encouraging signs for the UK. Several factors point to a compelling case for UK resilience and for investors, and the opportunities may outweigh the risks.
Market tolerance and conditions
This year has brought a lot of volatility in longer-dated and rate-sensitive bonds, continuing the broader trend of rising borrowing costs. Importantly, this is not unique to the UK. Bond markets worldwide, from Australia and the USA, to parts of Europe and Japan, have faced similar or worse.
UK equities, however, have held up well.
The FTSE 100 with 70-80% of earnings generated overseas, is up. Even more rate-sensitive indices, like the domestically focused FTSE 250, saw only modest declines. Small caps have been more turbulent, but considering the backdrop, the pullback is far from disastrous.
The UK labour market is softening, but job losses remain modest and largely sector-specific, in services and hospitality, although the recent National Insurance rise has added pressure. There may be knock on effects if Reeves pursues further business tax hikes, but so far, the impact has been limited.
Crucially, UK equity markets have repeatedly shown resilience in the face of shocks, from geopolitical tensions to tariff deadlines. Inflation, while sticky, looks unlikely to return to pandemic-era inflation levels of 7-10%. CPI was 3.8% in August, unchanged from July and the market appears comfortable with it in the 3-3.5% range. If inflation climbs towards 5%, or stagflation emerges, a reassessment of small-cap exposure would be wise, but for now, resilience looks more likely than vulnerability.
Other supportive factors include consistent rate cuts, cheap valuations and ongoing M&A activity. REITs for example, are performing well, offering attractive income options.
Institutional investors are already recognising these opportunities, especially with rate cuts likely. With so much capital sitting in retail cash savings, government measures to encourage greater domestic retail investment participation could provide a further boost.
Budget implications
Labour’s first year in government hasn’t been easy. Politically, there has been little appetite for welfare reform, while tax rises have complicated relations with business.
The decision to schedule the Budget in late November, rather than the usual October, signals the scale of the challenge. However, commitments like defence spending, which are valuable for UK manufacturers, look set to remain intact.
On corporate taxation, leaks to the press suggest a profit levy on gambling companies may be in the offing, which seems politically a relatively safe option. Another option rumoured to be under discussion is a levy on banks, capitalising on their strong profits. The combination of the sector’s strength and the public’s distrust of banks could make it an easy target.
Delivering on promises to cut red tape in housebuilding would be a positive step. Faster approvals for example, would provide a welcome boost to listed builders and to growth more broadly.
During his state visit to the UK, US President Donald Trump said he saw a great partnership between the two countries. Dubbed the “Tech Prosperity Deal” an additional £150bn of investment into technology has been agreed furthering the economic ties between both nations. This level of investment should be good for job creation, and filter into the broader UK economy, helping stimulate growth and consumption.
The road ahead
However, risks remain. Increased UK inflation or the emergence of stagflation could undermine the resilience UK equities have shown so far. Business tax rises could also impact growth and the UK’s investment prospects.
But opportunities also stand out. For income seekers, shorter dated gilts and investment grade credit, which are less interest rate sensitive, continue to offer attractive yields. Meanwhile, the market has priced in as many as six US rate cuts, meaning a US Treasury rally could provide valuable downside protection.
Overall, with a diversified and defensive strategy, the outlook for the UK remains strong.
This article is intended for regulated financial advisers and investment professionals only. Copia does not provide financial advice. This information is not intended as financial advice and should not be interpreted as such.