Upswing Not Matched By Investments

LONDON – In 2025, Britain’s stock market is outpacing Wall Street, and the UK economy has posted the strongest growth among G7 nations in the first half of the year. Yet while overseas investors are benefiting from this upswing, many British investors remain on the sidelines.

For years, the UK equity market has struggled with sluggish returns and a drought of IPOs, leaving domestic sentiment muted. Against this backdrop, any hint of good news spreads quickly among local investors. Recently, I received several notes about research from Schroders indicating that US investors have been putting more money into UK equities than into any other market. After pulling nearly $100 billion from the UK between 2020 and 2022, American buyers have since staged a consistent comeback.

British investors, however, remain far less enthusiastic. According to the Investment Association, retail investors in the UK have withdrawn more than £50 billion ($68 billion) from domestic equity funds over the past five years, even as they poured £25 billion ($34 billion) into global stock funds. Unlike their American counterparts, they have yet to warm to UK shares despite signs of improvement.

This pessimism is nothing new. Consumer confidence has remained negative on average for more than four decades, with sentiment worsening after the 2008 financial crisis. That negativity has filtered into institutional allocations as well. In 1997, UK pension funds devoted 53% of assets to domestic equities; by 2022, that figure had fallen to just 6%, according to think tank New Financial.

Ironically, the economy is thriving not thanks to British investor confidence, but in spite of it. The UK recorded 2.2% annualised GDP growth in the first half of 2025, beating the US at 1.2% and the eurozone at 1.4%. Growth has been driven less by strong household spending or business investment—which expanded just 0.9% and 1.7%, respectively—and more by external demand. A sharp 20% drop in the trade deficit, as foreigners consumed more UK goods and services, was the key driver.

Earnings Strength, Market Surprise
UK analysts appear just as slow to recognise the turnaround. During Q2 2025 reporting, FTSE 350 companies exceeded profit expectations by an average of 16.5%, compared with 8.3% for S&P 500 firms. In the US, where an 8% earnings beat is now seen as routine, share prices fell by nearly 1% in the days following results. In contrast, UK shares rose 1.1% on average after earnings releases, suggesting investors were caught pleasantly off guard by the resilience of British companies.

Too Much Gloom?

Britain’s national tendency toward gloom may have tipped into excess. As a German, I find myself noticing that the British are, if anything, overly pessimistic about their prospects—a telling sign. The data paints a more balanced picture: inflation remains stubborn at 3.8%, the highest among advanced economies, though July’s spike was mostly driven by volatile transport costs. Domestic services show signs of weakness, and possible tax rises in the autumn present a mild drag on investment. Yet none of these appear sufficient to derail momentum.

Meanwhile, London’s IPO market is showing signs of revival. French media group Canal+ listed last year, energy company Metlen from Greece followed this August, and Norwegian software giant Visma and Italian food producer Newlat are preparing for debuts. Foreign companies evidently see London as an increasingly attractive market for capital raising.

The message is clear: international investors and businesses are rediscovering Britain’s appeal. Perhaps it’s time the British themselves started to believe it.