Is it finally time to buy British?

Important information - the value of investments and the income from them can go down as well as up, so you may get back less than you invest.

US stock market dominance over the UK, and pretty much everywhere else, has sliced potential returns off my pension savings in the past few years. That is because I have been leaning toward British funds and shares in recent years.

However, recent market mayhem has levelled things off a little. Consider that the FTSE 100 is only 2.6% down in 2025 compared to 8.8% for America’s S&P 500 - and more than 13% for the Nasdaq technology market (figures to Monday’s close - 14 April).

Every country and every company is still digesting Donald Trump’s ‘Liberation Day’ tariffs. And the daily volatility suggest markets can’t seem to calculate the impact. Down 6% one down, up 3% the next, although things seem to be settling a little.

These are difficult times for investors. It is hard to know whether to buy or sell. Or lock yourself in a room and hope it all blows over.

But a crisis often offers opportunity. Market falls sharpen your focus and provide the perfect catalyst to review the balance of your portfolio.  Were you holding bonds, which often rise when shares falls? Or were you 100% invested in shares but coped with the discomfort. If so, maybe you don’t need to hold bonds.

The engaged DIY investor will also be attuned to the geography of their investments. And with a new world order emerging, should they be tweaking that global allocation?

The problem is that we don’t know what the new world order will look like. It is likely to be one of faltering global trade, but it could be one of greater exchange between Asia and Europe. Who knows? I’m going to limit my theorising and instead focus on a stock market we know better than any other. Let’s talk about Britain first.

The appeal of British shares

The British market has been cheap for a long time and remains cheap. This view is based on various measures. The price-to-earnings (p/e) ratio is one common gauge of value. Before the recent turbulence, the FTSE 100 was trading at 11.9 times forecast earnings. In contrast, Europe was on 13.9 and the US on 21. In other words, British shares were 43% cheaper than those in the US.

The recent turbulence will mean some late nights for analysts as they redraw their forecasts for earnings. Most British companies will earn less money and so cheaper share prices will not necessarily pass through to a lower p/e ratio. But to repeat the point, British shares were cheap against their historic norms and against elsewhere, and now they’re likely to be even cheaper.

Secondly, the UK offers better dividend yields than other markets. The income from UK shares was at 3.8% before the tariff war rattled markets. That compared with 1.8% for world stock markets and 1.2% for the US. 

Once again, the ability of companies to pay dividends may be undermined by the economic uncertainty or directly by tariffs. But notional yields will be pushed up by falling share prices. Some of them are incredibly high. Shares in Britain’s biggest listed insurer, Legal & General, were yielding 9.8%. Shares in investment companies Phoenix and M&G both offer yields above 10%. Double digit income from such big companies is rare.  

More broadly, we’ve had a long market rally where returns were driven by growth in share prices. We may move to one where dividends become more important to total returns.

• Read: Investing in the UK stock market: 5 British ISA fund ideas

The Great British economy

An improving economy helps company profits. Forecasting the economy is difficult even during stable conditions, let alone amid the current maelstrom. The red pencils are already being sharpened. A survey of forecasts compiled by Consensus Economics shows UK GDP is now expected to grow by just 0.8% in 2025, down from 1.2% at the start of the year.

But there are some near-term positives. It was revealed last week that the UK economy grew by a remarkable 0.5% in February. More remarkable, it was driven by manufacturing - cars, electronics and pharmaceuticals. Mr Trump would be envious. Another positive has been inflation which was lower than expected in March at 2.6%. It means the Bank of England may be more inclined to cut rates, which would boost the economy. Markets moved to price in four UK rate cuts for 2025 - from 4.5% to 3.5%. It’s good news for borrowers but rate reductions also encourage investors to seek income, moving away from cash and to shares and other investments with growing income.

The approval of several big infrastructure projects, such as airport expansion and a new tunnel under the Thames, may also help growth. And today, some of these projects can be backed by individual investors - and they offer this potential of growing income. The International Public Partnership investment trust (INPP) has invested in hundreds of infrastructure projects. More than 70% are in the UK, including the recently opened ‘super sewer’ in London. It aims to grow its yield each year, currently 6.1%, and makes our list of Select 50 favourite funds. It is worth noting that it rose amid last week’s volatility, up around 5%. I hold INPP shares in my personal pension.

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But the real question is, how will the UK fare in the new world order? Can Britain forge a new role amid the chaos and become a bridge between Europe, Asia and the US? It is a big unknown.

So-called defensive sectors of the stock market might continue their stronger performance if volatility remains. This includes drug companies, supermarkets, and utilities. Although nothing is simple now. Pause or no pause, drug companies face an extra 10% cost for selling into their biggest market - the US. By the time you read this, it may be higher. Donald Trump has been hinting at a tariff of 25% on drugs.

Could refuge lie in companies entirely focused on the UK? These are more likely to be found in the FTSE 250 index of medium-sized companies than the FTSE 100. Winners over the first week of turmoil (yes, there were some) included electronics retailer Currys, up 6.5%, building materials supplier Travis Perkins, up 4.1%, and Mitchells and Butlers, behind All Bar One and Toby Carvery, up 7.6%. Alternatively, you can invest in all of mid-sized corporate Britain: the Vanguard FTSE 250 ETF is the pick from our Fidelity Select 50 list, with a charge of just 0.1%. 

Finally, we may be seeing a return of love for UK shares among the home audience. Our Fidelity Be Invested survey asked in February where UK investors see the best buying opportunity in the next 12 months¹. British shares were named by 45% of respondents compared, up from 34% two years earlier. Among those aged under 35, 68% named the British stock market. We’re about to ask investors again and I expect another rise. 

For my part, I’ve been steadily increasing the percentage of my portfolio invested in the UK in recent years. The steady climb has taken it from 10% to nearly 24%, a high figure compared with a typical global tracker fund that would only have around 3% or 4% invested in British shares. I’m only telling you what I’m doing as an active DIY investor, leaning my portfolio to cheaper parts of the market. This may not be the right thing for you but it’s worth checking your own exposure. This can be down with our portfolio X-ray tool, explained here: Tools that can make you a better investor.

But what about the current volatility?

There are so many aphorisms thrown around at times like this - ‘buying now is like trying to catch a falling knife’, etc. I turn to two bits of historic data to retain balance at times of high market stress. The chart below shows what happens if you lose your nerve and are not invested in the best days.

The data is for the UK but the pattern is similar for the US and elsewhere. For the UK, if you missed the best 30 days over a 32-year period your total return would be reduced from 763% to 81%.

The impact of missing the 5 or 30 best-performing days over the long term*

^{Source: Refinitiv, Fidelity International, April 2025. * Period of analysis: 31.12.92 to 7.4.25. All calculations use local currency total returns, except for Nikkei 225, for which the calculations are used on the price index. Past performance is not a reliable indicator of future returns.}

Secondly, I look at what’s happened to the FTSE 100 after the biggest one days falls. Each time, the market has posted impressive gains in the five years that followed, as shown below and explained here.

Source: Fidelity International, Refinitiv, April 2025

Of course, these historic market patterns may not be repeated. There is a further caveat when buying cheap markets. They can remain cheap for extended periods, as the UK has already experienced. It requires patience from investors. The upside is that with the British stock market you should at least collect very decent income while you wait, patiently.

This article was originally published in This is Money

Past performance is not a reliable indicator of future returns

Source: Refinitiv, total returns from 31.3.20 to 31.3.25. Excludes initial charge.

• Read: What is volatility? The basics
• Read: When markets wobble, stick to the facts
• Read: Do I need to change my pension plans?

Source:

¹ Research of 1,000 retail investors conducted by Opinium Research, 6-11 February 2025