Patient investors have an opportunity to capture both income and capital growth in the UK equity market due to its low expectations and valuations.

This is according to Janus Henderson portfolio manager Laura Foll, who in a recent note points out that “the UK economy and stock market are not the same”.

UK equities have been out of favour for most of the past decade, after the country has grappled the economic fallout of Brexit, slowing GDP growth and unstable political leadership.

Over the past 10 years, the FTSE All Share index has delivered a 131.5% return, less than half that of the S&P 500 index return of 319.2% over the same period.

However, the out of favour nature of the UK equity market has created an opportunity for patient investors, Foll argues.

A contrarian opportunity

“UK equities continue to be seen as a contrarian allocation, allowing valuation gaps to persist even as fundamentals improve. Over time, however, earnings and valuations tend to reconnect,” she said.

“Identifying companies where sentiment is anchored to the past while operational performance strengthens is key to unlocking returns.”

Foll notes that the valuation spread between the UK equity market versus the rest of the world is close to the highest it has ever been in the past 30 years.

“While valuation alone is not a catalyst, it becomes compelling when paired with improving fundamentals,” she said.

“This also supports dividend income. Higher yields allow investors to be paid while waiting for sentiment to recover.”

She added: “Ongoing takeover activity further suggests strategic buyers recognise value that public markets may still overlook.”

Global exposure at a discounted price

UK equities also offer investors substantial international exposure while trading at a UK equity market discount due to the country’s weaker domestic growth, Foll argued.

She said: “Many UK-listed companies generate a significant share of revenues overseas, meaning investors can access global businesses at discounted valuations.”

Additionally, the dividend income featured in many UK equities make them easier to hold during turnarounds and cyclical recoveries, Foll added.

“New management and strategic change can unlock value, as seen in companies like Marks & Spencer and Babcock. These turning points are often underappreciated early on,” she said.

“At the same time, capital growth does not require strong UK GDP. Structural drivers such as infrastructure investment and defence spending are supporting companies including Costain, Balfour Beatty and Babcock.”