Falling interest rates will continue to boost UK equities next year; dealmaking activity will hand shareholders healthy paychecks; and at least one of the UK’s listed laggards will make a big comeback. There could even be another stock market record high on the FTSE 100.
That is the theory, at least.
It is hard to make predictions. At the end of 2023, very few fund house investment previews were discussing the possibility of a second Donald Trump term in the White House, if they even mentioned it at all. It’s a reminder that truths can be uncomfortable—and that the future is uncertain. Nonetheless, patient investors stand to benefit, provided they stay the course. The UK is a good place to start.
Is The UK An Attractive Place to Invest?
So says Morningstar Investment Management’s 2025 Outlook. It argues current valuations in the US look expensive and that better opportunities may lie elsewhere. Investors looking for high-quality bargains would still do well to consider UK housebuilders in their portfolios.
“On an absolute basis, European equities are trading at around a 5% discount based on our bottom-up valuation model. Not cheap, but also not expensive compared with where markets have traded over the past few years,” the report begins.
“The relative picture is even more compelling with Europe—the UK in particular—making it the most attractive developed markets region globally. Add to this the macroeconomic tailwinds of rising gross domestic product, falling inflation, and lower interest rates, and the picture looks even brighter.”
Housebuilders like Barratt Redrow BTRW, Berkeley Group Holdings BKG, and Persimmon PSN are still solid options. Each company’s stock price has weathered a difficult year, with Barratt falling -22.89%, Berkeley falling -15.85%, and Persimmon falling -9.39% year to date. But valuations now look attractive.
“UK homebuilders have been through the wringer. At one point, they lost two thirds of their value from the 2021 lockdown highs, share prices have rallied over the past year, but we still believe names in this space could rise by as much as 50%,” it says.
“Lower interest rates are leading to more affordable mortgages, and supportive government policy should help pave the way in 2025.”
How Much Will The Bank of England Cut Rates in 2025?
At the end of 2023 many commentators expected rate cuts galore from the BoE in 2024. By the end of this year it will only have cut rates twice: in August, and then in November.
Michael Strobaek, global chief investment officer at Lombard Odier, and Dr Nannette Heckler-Fayd’herbe, the company’s head of investment strategy for sustainability and research, say that, provided UK GDP growth comes in as projected, and inflation continues to moderate, monetary policy will be supportive of rising valuations.
“In the UK, we expect somewhat higher [economic] growth in 2025, and inflation slightly above target, with revised fiscal rules providing more fiscal flexibility,” they say.
“Still a more moderate inflation path should allow the Bank of England to cut rates more extensively than markets expect.”
As political commentators all too keenly pointed out after the Labour government’s first Budget in October, much depends on economic growth. The government is expecting GDP to leap to 2% in 2025 from 1.1% in 2024.
But the government—and the Office for Budget Responsibility specifically—has been wrong before. The absence of accurate UK labor market data—and a further delay announced just last week—won’t do much to assuage skeptics. On Dec. 4 BoE governor Andrew Bailey told the FT that he was expecting four rate cuts in 2024, which is ahead of market expectations.
Will The FTSE 100 Look Different in 2025?
That’s all political. But politics played an important role in 2024, and could do so again next year.
In 2024, a listings regime overhaul changed the way that companies list in the UK. The policy is a legacy from the Rishi Sunak era but will still be completed by the Starmer administration. It is designed to make it easier for companies to list, and for investors to benefit as a result.
Until this year, companies listed in London required a “premium” listing to qualify for inclusion in a FTSE index. A new category created in July—“Equity Shares Commercial Companies”, or ESCC—now merges the premium and standard listing categories. That opens the door to more companies being included in the top tier of the UK equity market. Companies that previously only had a “standard” listing are now in a “transition” category, and must apply to switch to ESCC.
This change could alter the way the FTSE 100 and 250 look.
Oxford Nanopore ONT and Coca-Cola Europacific Partners CCEP have already made the leap, while THG THG, which floated in 2021 and has endured an abysmal performance since, is aiming to confirm its transfer “no later than March 2025”. It is possible many more will do so next year. If you own passive FTSE “tracker” funds or exchange-traded funds that mimic movements in the UK markets, they will automatically buy new constituents. It’s worth keeping an eye on this process.
Meanwhile we’ve just had a FTSE reshuffle that saw three stocks promoted to the FTSE 100, in a move that will take place just before the Christmas break. So the blue-chip index will look different as 2025 starts.
Which Companies Will IPO In 2025?
And speaking of new constituents, investors are desperate for an exciting initial public offering (IPO) to bring energy back to London’s markets. One fund manager is predicting that the UK “IPO drought” will end in 2025, but you shouldn’t get your hopes up.
Shein, the fast-fashion brand whose supply chain issues have already made it the target of criticism and ethical concerns, will likely list next year. In late November, Financial Conduct Authority chief executive Nikhil Rathi, who is himself a former chief executive of the London Stock Exchange, appeared to give the green light to a company like Shein floating.
Investors might not even have to wait until next year to see a decent IPO. But there’s a catch.
Film and TV production group Canal+, which is demerging from Vivendi VIV, should float on the London Stock Exchange on Dec. 16. Its £6.7 billion valuation means it would normally list on the FTSE 100, but that cannot happen because its IPO prospectus states it will not adhere to the UK’s Takeover Code. That means investors looking for a big FTSE 100 will have to search elsewhere.
They might be searching for a while. Revolut chief executive Nik Storonsky says a London listing would not be “rational” because of liquidity and tax. It also looks like Klarna, the buy-now-pay-later app whose popularity among young people has raised eyebrows, will reject London for New York.
“If you look at trading in the UK, you always pay a stamp duty tax which is 0.5%,” Storonsky told a podcast last week.
“I just don’t understand how the product which is being provided by the UK can compete with the product provided by the US.”
Will The Laggard UK Stocks Make a Comeback?
And as for the laggards, there have been a fair few in 2024. Burberry BRBY fell out of the FTSE 100 in late August, Aston Martin Lagonda’s AML turnaround plan stalled in late September. Though Kingfisher KGF had a good first three quarters, the B&Q and Screwfix owner isn’t exactly nailing it in Q4, and now has a lower Morningstar fair value estimate as a result. Year to date, its shares are up 6.71%, underperforming the wider FTSE 100, which is up 7.98%.
Ocado Shares Have Struggled in 2024
Source: Morningstar Direct
And then there’s Ocado OCDO, the technology-enabled online supermarket. This year it fell out the FTSE 100, and year to date shares are down a whopping -56.11%. That’s a far cry from its pandemic share price high of £28.08 in February 2021. Its valuation is bad news for current investors in the company, but represents a potential buying opportunity for patient newcomers. According to Morningstar analysts, the company is now significantly undervalued.
But comebacks are possible, as the ride experienced by St James’s Place STJ investors this year testifies. After the UK’s largest wealth manager was forced into line by the FCA last year over its business practices, its stock lost more than half its value, but this year staged a remarkable comeback—thanks to rising assets under management and a cost-cutting plan that impressed investors. Year to date, SJP’s stock price is up 33.01% and the company will join the FTSE 100 at the end of the year. Nobody had that on their bingo list for 2024.
St James’s Place Share Price Has Bounced
Source: Morningstar Direct
UK M&A Returned This Year
Mergers and acquisitions activity returned to London in 2024, with Hargreaves Lansdown HL HL. among the notable private equity deals. 2025 could see a repeat, and particularly if struggling stocks like Burberry BRBY and Dr Martens DOCS attract the attention of bargain-hungry consolidator companies.
We already know that Aviva AV. is serious about its bid for Direct Line Group DLG, and Morningstar analysts point out a deal would be in DLG shareholders’ interests. Burberry has already been the target of at least one reported bid from Moncler. If valuations remain depressed across the UK’s markets and dividends don’t cut it, that’s only going to encourage investors to look for value in other ways.
All in all, it will certainly be a busy year. Will the FTSE 100 top its May 2024 high of 8,445.80 in 2025? You’ll have to wait until the Santa Rally is over to find out.
The author or authors do not own shares in any securities mentioned in this article. Find out about Morningstar's editorial policies.
