Global investors are becoming increasingly bearish on UK equities as improving sentiment towards the global economy drives demand for cyclical and technology stocks, leaving London’s defensive market increasingly out of favour with hedge funds and other institutional investors, according to a report by Bloomberg.
The report cites Bank of America’s latest global fund manager survey as revealing that investors are now a net 37% underweight UK equities, the most negative positioning since August 2020. The UK has also emerged as one of the survey’s leading “contrarian trades,” with some investors viewing it as a potential hedge should optimism about global growth begin to fade.
The UK’s equity market has significantly lagged both European and US peers in 2026, largely reflecting its limited exposure to artificial intelligence and other high-growth technology sectors that have dominated market performance this year.
Technology companies account for just 1.2% of the FTSE 350 Index, while traditionally defensive sectors, including consumer staples and healthcare, represent around one-third of the benchmark. Energy stocks also make up a relatively large share of the index, leaving UK equities more sensitive to fluctuations in oil prices than many overseas markets.
Political uncertainty has also weighed on investor sentiment. Weak domestic economic growth, elevated interest rates and uncertainty surrounding Prime Minister Keir Starmer’s expected departure have all contributed to a cautious outlook for UK assets.
Goldman Sachs said domestic institutional investors continue to withdraw capital from UK equities, with mutual funds recording almost £20 billion of net outflows during the first quarter. The bank said retail investors have also remained cautious, while pension funds and insurers continue to reduce their domestic equity exposure. Foreign investors, by contrast, have been modest net buyers.
For event-driven and merger arbitrage hedge funds, however, London’s depressed valuations continue to create opportunities.
Strategic merger and acquisition activity remains stronger in the UK than elsewhere in Europe, according to Goldman Sachs, with overseas buyers and private equity firms continuing to target listed British companies trading at significant valuation discounts.
Recent takeover activity has included interest in EasyJet, a bid by telecoms billionaire Xavier Niel for Emirates Telecommunications Group’s stake in Vodafone, and Prologis’ approach for logistics property group Segro, reinforcing the view that UK-listed companies remain attractive acquisition targets.
Laura Foll, UK equities portfolio manager at Janus Henderson Investors, said the elevated level of takeover activity reflected the substantial valuation gap between UK and US-listed companies.
She also pointed to a growing wave of share buyback programmes as another supportive factor, with boards increasingly repurchasing shares to offset persistent investor outflows and take advantage of depressed valuations.
The FTSE 350 currently trades at roughly a 35% discount to the MSCI World Index. While analysts note that part of the discount reflects the UK’s sector mix, valuations remain attractive even after adjusting for industry composition.
Renewed geopolitical tensions in the Middle East could also improve the relative appeal of UK equities. Higher oil prices have historically benefited the energy-heavy FTSE index, while periods of elevated uncertainty have often favoured defensive markets.
Despite these potential tailwinds, major investment banks remain cautious. Barclays continues to prefer eurozone equities, JPMorgan maintains a neutral stance on the UK, and Citigroup recently downgraded the market to underweight.
