In a remarkable turn of events, UK markets have delivered their strongest performance in years during 2025, sparking optimism among investment experts. Despite some lingering concerns, the future looks promising.

While the economy faces challenges and London’s status as a hub for major stock listings is in question, the city’s leading FTSE 100 index approached record highs as the year drew to a close.

In a mid-December analysis from Fidelity International, the UK emerged as the fourth best-performing asset class in 2025 compared to the previous year.

Jemma Slingo, a specialist in pensions and investments, observed, “The UK stock market has defied expectations and performed exceptionally well, considering the hurdles faced by the domestic economy.”

She further noted, “The FTSE 100, consistently neither at the top nor the bottom of performance charts, has achieved an impressive 22 percent total return so far this year, reminding us that stock markets often operate independently of the economy.”

Asset Class Performance in 2025 and 2024

The UK is predicted to be a top performer next year and over the next five years too, the runner-up only to emerging markets, according to a fund manager poll conducted in late November by the Association of Investment Companies.

The UK got the vote of 19 per cent of the 22 investment trust managers surveyed as offering the most attractive prospects for next year, compared to 38 per cent for emerging markets.

The results were 19 per cent and 28 per cent respectively looking ahead for five years, with China and Europe tied at 14 per cent.

Two thirds forecast the FTSE 100 index will climb above 10,000, against 24 per cent who believe it will stick between 9,000 and 10,000c, and 10 per cent who think it will fall below 9,000.

UK is riding high but value can still be found

‘The London market looks primed to deliver its best total return since 2009,’ says AJ Bell’s investment director, Russ Mould.

‘The FTSE 100 is ending 2025 near record highs and dividends and share buybacks are neatly supplementing the capital gains.’

That flies in the face of major challenges, which he sums up as follows: ‘Concerns over a sluggish domestic economy, a stronger pound, brittle government finances, a dearth of new listings and an ongoing exodus of companies owing to takeovers and moves to other exchanges.’

Looking ahead, Mould reckons ongoing merger and acquisition activity suggests there is still value to be found in the UK, especially as many deals are being struck at big premiums to share prices.

‘As we enter 2026, the UK market may still feature stocks that could appeal to a wide range of investment strategies and risk appetites.’

Imran Sattar, fund manager of Liontrust UK Equity fund, warns the UK presents a mixed picture.

‘Corporate and consumer debt have trended lower, improving balance sheet health. However, employment levels have been persistently weak for over a year, reflecting structural challenges beyond post-Covid normalisation. Short-term risks remain elevated across markets.’

Sattar favours ‘advantaged businesses’ that are well-positioned to deliver durable returns.

‘These include high-quality companies with above-average returns on equity, strong growth prospects and prudent leverage structures. Building portfolios that are both economically and thematically diversified will enhance resilience against market uncertainties.’

Stock ideas for 2026

Online broker AJ Bell highlights four shares with potential appeal for different kinds of investor.

Cautious investors: GSK

The one thing that neither equity, nor fixed income nor currency markets, seem to be pricing in for 2026 is a global economic slowdown or recession, so it makes sense to include a stock with defensive qualities just in case, says AJ Bell.

GSK trades on barely 10 times forward earnings and comes with a 3.9 per cent dividend yield for 2026, according to consensus analysts’ earnings forecasts, it notes.

‘The early vibes are that incoming chief executive Luke Miels is not planning on major surgery at the FTSE 100 index member when he takes over from Dame Emma Walmsley in January, given how he is already publicly backing existing targets for profit margins in 2026 and revenues for 2030.

‘Analysts are treating both goals with scepticism, especially the one for sales, given patent expiries in 2028 and 2029 in GSK’s HIV portfolio in particular. Lingering uncertainty over US policy on vaccinations under Secretary of Health and Human Services Robert F Kennedy Jr is also weighing on sentiment.’

AJ Bell says GSK’s management counters that its drug development pipeline is more than capable of driving future growth, while a first share buyback since 2013 speaks of confidence and tops up the total cash return from the stock.

Balanced investors: Telecom Plus

‘A share price chart that goes from the top left-hand corner of the screen straight down to the bottom right is not a pretty sight, and shares in Telecom Plus are no higher now than seven years ago, after a fall of more than 30 per cent in the past six months,’ says AJ Bell.

‘Yet this fall could represent an opportunity to tuck away a stock with a strong long-term record of growing its customer base, profits and dividends.’

Telecom Plus provides energy, mobile, insurance and broadband services to more than 1.4million customers, and higher costs related to meter installation, a supply deal with E.ON, increased bad debts and higher customer churn all hit first year profits, it notes.

‘An increase in the interim dividend spoke of management’s faith in the outlook, and Telecom Plus can point to dividend payments worth 922p a share in the past decade, a figure which bears scrutiny in the context of the current share price and the healthy balance sheet carrying relatively little debt.

‘Forward earnings multiples of around 12 times and 11 times for the fiscal years to March 2026 and 2027 respectively, with a forward dividend yield of more than 7 per cent, may also provide the right mix of upside potential and downside protection.’

Adventurous investors: Bellway

The current share price reflects scepticism about the scope for and pace of any upturn in the UK housing market, says AJ Bell.

Bellway trades at 0.9 times its year-end tangible net asset value per share figure, and that discount of 10 per per cent provides investors with some downside protection and potential for capital appreciation, it reckons.

The broker says Bellway is well positioned for an upturn as it is carrying inventory worth £4.8billion on its balance sheet, the equivalent of 748 days’ sales, so improved sell-through and completion volumes would release cash to invest in the land bank and the competitive position, and once that is done fund dividends and share buyback programmes.

‘Analysts’ consensus forecasts for dividends for the year to June 2026, coupled with a £150million buyback, already equate to nearly 8 per cent of the current stock market capitalisation, as an added potential attraction.’

Income investors: Lancashire Holdings

‘Lloyds of London syndicate manager Lancashire has a strong record of skilled underwriting in its specialist areas of insuring and reinsuring across aviation, property, marine and energy and generating healthy profits and dividends for its shareholders,’ says AJ Bell.

‘Between 2008 and the first half of 2025, it has paid out more than 900p a share in ordinary and special dividends, a figure which catches the eye in relation to the current share price.

‘Consensus analysts’ forecasts for dividends which imply a double-digit percentage forward dividend yield may also intrigue income seekers, particularly as Lancashire is expected to pay a special dividend payment for the fourth consecutive year in 2026.’

The broker says that some investors will shy away from catastrophe insurance and reinsurance as they look at climate change and fear the worst, but Lancashire’s exposure to the California wildfires proved more than manageable and the 2025 storm season has been relatively quiet, even allowing for the awful treatment handed out to Jamaica by Hurricane Melissa.

‘The outlook for 2026 earnings and return on equity is good. Although, perversely, fewer pay-outs across the industry means more capital is retained within it and competition for business could hit prices as a result.’