9 October 2025

UK Equities: Rethinking large cap

    

Ahead of the UK budget Edison has published it's Q3 2025 market review of UK equities. 

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Rethinking UK large caps In a year marked by tariffs and geopolitical uncertainty, UK equities have delivered returns of c 15% year-to-date, matching the S&P 500 (14.2%). Both the UK100 and Euro Stoxx 50 posted local currency gains of 14.9%. Yet UK equities remain 'the most unloved assets right now' according to Bank of America's September 2025 poll, with a 20% net underweight position. This extreme pessimism, combined with a 35% valuation discount to global peers and 5-6% total shareholder yields, creates a compelling contrarian opportunity.

Key themes

• UK market trades at 35% discount to MSCI World despite 80% of UK100 revenues from overseas
• Total shareholder yield of 5-6% combining 3.3% dividend yield plus £49.9bn in buyback programmes
• Bank of America survey shows 20% net underweight - most extreme positioning since 2004
• 41 takeover bids announced year-to-date with 11% of mid-cap index acquired in 2024
• Private equity's shift to quality leaves turnaround opportunities for public market investors
• Rachel Reeves' 26 November budget expected to provide clarity and potential relief rally

Core insights

• UK All Share yields 3.3% with projected £83.9bn dividends in 2025 (7% growth year-on-year)
• Approximately 46 companies running active buyback programmes adding c 2% to yields
• Germany's €500bn+ rearmament programme benefits UK defence and financial sectors
• Rising electricity standing charges (up 94% for SMEs from April) pressure consumer-facing sectors
• ONS household savings revisions make reliable equity income streams more valuable
• UK250 notably lagged UK100 year-to-date, creating opportunity as dollar weakness expected

Companies highlighted:

Large-cap defensives: flight to quality

• Imperial Brands (50%+ returns in 2024): substantial yield with defensive characteristics
• British American Tobacco (up 30% YTD): 6.27% dividend yield
• Diageo, Unilever, Tesco: reliable consumer staples income streams
• National Grid (£9bn Great Grid Upgrade): regulated utility returns
• Centrica, Severn Trent: essential service exposure
• GSK, AstraZeneca: healthcare with 3.5-4.0% yields
• Compass Group: recession-resistant global catering

Financials: yield curve plus capital returns

• Barclays (8% total shareholder yield): 2.5% dividend plus buybacks
• HSBC: quality exposure approaching target prices
• Lloyds (3.0-3.5% yield): pure UK retail banking with buybacks
• Standard Chartered: emerging markets focus, 50% upside to consensus targets
• Metro Bank: 100%+ consensus EPS growth FY26 vs FY25

Early cyclicals: UK consumer recovery

• Forterra, Ibstock: building materials, potential to double on normalised housing volumes
• Wickes, DFS, Dunelm: home improvement retail exposure
• Topps Tiles: high operational gearing, improving momentum
• Currys (45p to 140p, targets above 200p): turnaround momentum
• Galliford Try, Kier, Morgan Sindall: construction contractors with infrastructure exposure

Defence: structural growth

• BAE Systems (mcap £47bn): £77.8bn backlog up 25% over 12 months, 75% defence revenues
• Rolls-Royce: defence engines and nuclear applications
• Melrose Industries/GKN: fighter jet components, additive manufacturing
• Concurrent Technologies: 85-87% defence revenue, £4m UK defence contract

Conclusions

• UK large caps offer compelling combination: 5-6% total yield, 35% discount to global equities, quality franchises
• Timing compelling with extreme pessimism (contrarian signal) and budget uncertainty likely to clear
• Four investment themes present distinct opportunities:
  • large-cap defensives offering 3-5% yields with balance sheet strength;
  • financials trading 40-50% below consensus targets at 6-9x P/E with capital returns;
  • early cyclicals at 4-7x earnings versus normalised 10-12x multiples; and
  • defence with government-backed multi-year revenue visibility
• Private equity's focus on quality due to higher funding costs leaves turnaround opportunities for public markets
• Catalysts building: 26 November budget, Q4 inflation data, German fiscal stimulus, accelerating corporate activity

 

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