Key Takeaways
- • Liontrust UK equity fund manager Victoria Stevens characterizes UK stock market valuations as "really very compelling," with UK shares trading at a significant discount relative to other developed markets—a valuation gap that widens further down the market capitalization scale.
- • The UK's Alternative Investments Market (AIM) has underperformed materially in recent years due to structural shifts including pension fund divestment from UK equities (exposure has fallen from approximately 50% to 2-4%), but Stevens identifies pockets of strong compounding growth opportunities for patient long-term investors.
- • Despite near-term economic headwinds including the Iran War's inflationary impact, downward growth revisions, and interest rate volatility, Stevens maintains conviction that the FTSE 100 and broader UK equity market remain decoupled from domestic economic weakness—a critical distinction for valuation assessment.
- • Early signs of AIM stabilization include improving liquidity conditions and stabilizing valuations, with catalysts emerging from M&A activity and share buyback programs, though broader institutional capital redeployment remains pending.
Summary
Victoria Stevens, manager of UK Equity Funds at Liontrust, argues for a constructive long-term position on UK equities despite significant macroeconomic headwinds and investor skepticism toward the domestic market. Speaking at the Morningstar Investment Conference, Stevens contends that UK share valuations represent compelling opportunity, particularly given the widening discount relative to developed market peers. This valuation advantage extends further down the market capitalization spectrum, creating particular opportunities in smaller-cap and AIM-listed securities that have faced sustained capital outflows.
The UK equity market enters 2026 against a complex backdrop. While the FTSE 100 reached record highs earlier in the year, the Iran War has introduced inflationary pressures, interest rate volatility has complicated yield expectations, and growth forecasts have been revised downward. Stevens acknowledges these economic challenges but emphasizes a critical analytical distinction: the UK stock market should not be conflated with the UK economy. FTSE 100 constituents derive substantial revenue from international operations and maintain limited domestic economic exposure relative to their headline indices, creating a valuation disconnect between macro conditions and equity valuations.
The AIM market, which has struggled materially in recent years, presents a particular focus for value-oriented investors. Structural factors including significant pension fund divestment from UK equities have depressed valuations and liquidity. However, Stevens identifies stabilizing conditions within the AIM ecosystem, including improving liquidity levels and signs of valuation stabilization. Early catalysts for potential revival include merger and acquisition activity and corporate share buyback programs. For institutional investors with multi-year investment horizons, the combination of depressed valuations, improving conditions, and exposure to compounding growth businesses creates asymmetric risk-reward characteristics, despite near-term economic uncertainty.
The relative underperformance of UK small-cap equities—both absolutely and relative to large-cap and global peers—reflects investor sentiment and structural capital flows rather than fundamental deterioration in underlying business quality, creating a basis for selective opportunity deployment.
The UK equity market enters 2026 against a complex backdrop. While the FTSE 100 reached record highs earlier in the year, the Iran War has introduced inflationary pressures, interest rate volatility has complicated yield expectations, and growth forecasts have been revised downward. Stevens acknowledges these economic challenges but emphasizes a critical analytical distinction: the UK stock market should not be conflated with the UK economy. FTSE 100 constituents derive substantial revenue from international operations and maintain limited domestic economic exposure relative to their headline indices, creating a valuation disconnect between macro conditions and equity valuations.
The AIM market, which has struggled materially in recent years, presents a particular focus for value-oriented investors. Structural factors including significant pension fund divestment from UK equities have depressed valuations and liquidity. However, Stevens identifies stabilizing conditions within the AIM ecosystem, including improving liquidity levels and signs of valuation stabilization. Early catalysts for potential revival include merger and acquisition activity and corporate share buyback programs. For institutional investors with multi-year investment horizons, the combination of depressed valuations, improving conditions, and exposure to compounding growth businesses creates asymmetric risk-reward characteristics, despite near-term economic uncertainty.
The relative underperformance of UK small-cap equities—both absolutely and relative to large-cap and global peers—reflects investor sentiment and structural capital flows rather than fundamental deterioration in underlying business quality, creating a basis for selective opportunity deployment.
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