UK markets look messy at a headline level. Politics, interest rates, geopolitics – take your pick of things to worry about. But underneath all that noise, a really interesting divergence is happening: valuations are low, company debts are relatively low, and M&A activity continues to boom. The value of UK takeovers surged in 2025 and so far this year, even as the number of deals has fallen back. Foreign-led deal values have hit record levels as overseas buyers – particularly from the US – recognise what domestic investors have been slow to see: many UK-listed companies are world-class businesses trading at a discount.
So this is emphatically not a market to buy with your eyes closed. It's a market where selectivity really matters. The opportunity is real, but it's not about buying ‘the UK’, it's about picking the right UK-listed companies.
We're focusing our stock selection on three areas: industrials linked to AI, idiosyncratic growth companies, and sectors with long-term tailwinds. We're more cautious on interest-rate-sensitive businesses, such as housebuilders and consumer discretionary companies, where real pressure on household incomes is still a risk.
Britain's hidden AI winners
When people think about AI investments, they think Silicon Valley: Nvidia, Microsoft, Alphabet, the usual suspects. But one of the most interesting ways to play AI in the UK is actually through industrial companies, rather than pure tech.
Take Halma, a conglomerate of around 55 niche businesses making the world safer, cleaner and healthier. Its photonics division supplies optical components used in data centres – the real-world infrastructure that AI runs on. Data centres are fundamentally constrained by how fast they can move data, and photonics solves that by using light instead of electricity, dramatically increasing speed and efficiency.
Then there's Diploma, which supplies the specialist wiring and cables that physically connect and power data centre infrastructure. These are mission-critical but low-visibility components, the kind of thing Meta and Google can't do without but that most investors never think about.
These companies give you exposure to the genuinely exciting growth from the AI build-out, but in a way that’s more diversified: both in that these companies are selling pick-axes to the AI and data centre gold-rusher companies, and that they supply many other industries as well. Most crucially, these businesses are generating strong cashflow too.
The UK's AI exposure is hiding in industrials, not in big tech. Because the UK doesn't have the obvious AI winners, it's been overlooked. Yet the second-order beneficiaries are genuine global leaders in their niches.
Military hardware – both real and fantastical
Defence is another area with powerful structural tailwinds. After decades of underinvestment, NATO and European governments are embarking on a multi-year rearmament programme. Companies like Avon Technologies, a provider of military-grade helmets and masks. Demand for these is wider than global armed forces; first responders and law enforcement increasingly need this sort of protection against chemical, biological, radiological and nuclear threats. Shortly after the outbreak of the war, the Ukrainian army requested that NATO only send Avon helmets in future, an important real-time endorsement. Avon has a growing order book and exceptional management.
Then there are the idiosyncratic stories – companies whose fortunes are driven by their own ecosystems, rather than the broader economy. Games Workshop is a perfect example. Most people, if they've heard of it at all, think of it as a toy company. It's not. It's a globally dominant owner of the Warhammer universe – a hobby empire spanning miniatures, paints, books, video games and licensing. It has an intensely loyal global fanbase, extraordinary pricing power, and a business model closer to LEGO meets Marvel than the makers of plastic-moulded green toy soldiers you used to find in Woolies. It just happens to be listed in the UK.
The food on your plate (and in your McMuffin)
Not everything has to be glamorous. Cranswick, a farm-to-delivery-lorry producer of pork and poultry products, is a good example of what's quietly working in the UK right now. It sells to supermarkets and quick-service restaurants – think your Egg & Bacon McMuffin – and benefits from consumers trading down from eating out to dining in, but still wanting the convenience of prepared food. With 35 years of unbroken dividend growth, it's exactly the kind of cash-generative, resilient business we focus on.
Rates: the lock and the key
The elephant in the room is interest rates. With UK gilt yields still elevated – the 10-year is hovering near 5% – rate-sensitive parts of the market remain under pressure. But if you look through the short-term noise, the key question is where rates go next.
While the futures market expects two quarter-percentage-point hikes in the coming 12 months, there are good arguments that this will turn out to be overly pessimistic. Bank of England Governor Andrew Bailey has said publicly that his committee is “in no rush to raise interest rates” during the uncertainty of the Iran war, as growth remains muted. There are increasing catalysts for rates to come down in the fullness of time. And when they do, parts of the UK market, particularly mid-cap FTSE 250 companies, could re-rate quite quickly. Rates are the gating factor, but that means there could be a pent-up release when they start to fall.
The opportunity in the UK is real. Sentiment is still dominated by broad-brush headlines. Yet underneath that, business fundamentals are stronger than the market is giving credit for. The evidence is already there in the data – dealmaking is healthy, companies are fitter than they've been in years, and valuations remain compelling versus global peers. The trick is being selective enough to find the gems.
