James Flintoft, head of investment solutions at AJ Bell, argues that Keir Starmer’s resignation adds political uncertainty but does not fundamentally alter the case for UK equities in diversified portfolios.
James Flintoft, head of investment solutions at AJ Bell, comments:
“Keir Starmer’s resignation has added another layer of political uncertainty for UK investors. Sterling has softened against the US dollar and the headlines are focused on what comes next. But for diversified portfolios, the investment message is more balanced: UK equities, particularly large caps, still offer attractive valuations, useful diversification and a currency-sensitive earnings profile that can help offset domestic uncertainty.
“The key thing to remember is that the FTSE 100 and large cap indices are not the UK economy. Many of the largest UK-listed companies are global businesses, with revenues linked more to overseas demand, commodity prices, interest rates and currency movements than to Westminster. A softer pound can therefore support reported earnings when overseas revenues are translated back into sterling, although the impact of that can be moderated by corporate hedging.
“The muted weakness in GBP versus USD is not only a sign of political concern. It can also provide a partial offset for internationally exposed UK large caps at a time when domestic sentiment is fragile.
“This is shown in the data, in the 27 months that the US market declined since the start of 2021, the UK equity market outperformed in 21 of those months.
Monthly UK large cap equity performance relative to US equities, % in GBP
| Jan | Feb | Mar | Apr | May | Jun | Jul | Aug | Sep | Oct | Nov | Dec | |
| 2026 | 3.7 | 6.3 | -2.9 | -5.2 | -5.7 | |||||||
| 2025 | 2.3 | 5.0 | 6.2 | 3.2 | -1.8 | -3.5 | -1.5 | 1.5 | -2.4 | -0.8 | 1.2 | 3.7 |
| 2024 | -3.0 | -5.6 | 1.6 | 6.2 | -1.0 | -5.4 | 3.0 | 0.9 | -1.6 | -4.8 | -4.3 | -0.1 |
| 2023 | 0.1 | 2.6 | -4.1 | 4.1 | -7.1 | -2.6 | 0.1 | -2.2 | 3.8 | -2.1 | -2.5 | -0.1 |
| 2022 | 6.0 | 3.4 | -3.9 | 5.5 | 1.7 | -0.4 | -5.2 | -1.7 | 0.2 | -1.6 | 5.2 | 5.4 |
| 2021 | 0.6 | 1.1 | -1.3 | -1.0 | 3.3 | -4.1 | -1.5 | -1.9 | 2.5 | -3.1 | -4.3 | 3.1 |
Why UK equities still matter
“The case for UK equities is not just about currency. The market has a very different sector profile from global and US indices, with less exposure to mega-cap technology and more weight in financials, energy, healthcare, consumer staples and industrials.
“This gives UK large cap equities a distinct return pattern and can reduce reliance on a narrow group of global winners.
“That diversification has been particularly useful during recent bouts of AI-related volatility. With US and global indices increasingly driven by a narrow group of technology and semiconductor names, the UK market’s lower exposure to this theme and greater weight in cash-generative, value-oriented sectors has helped provide a different source of equity return when enthusiasm around AI has faded.
“Valuation also remains important. UK equities have traded at a persistent discount to global peers, reflecting weaker domestic growth, political instability, Brexit-related uncertainty and lower exposure to high-growth technology companies. But low expectations can be helpful for long-term returns if fundamentals prove more resilient than feared.
“Recent takeover activity reinforces that point. Bids for UK-listed companies, including DCC, Tate & Lyle, Darktrace, Britvic, Direct Line, Spectris and now Segro, to name a few, suggest overseas and private buyers continue to see value in the market. This can crystallise value for shareholders, but it also raises a structural concern. If public markets keep losing quality companies without enough new listings to replace them, the depth and breadth of the UK market could weaken over time.
Portfolio implications
“The resignation of a prime minister is politically significant, but portfolio decisions should still be based on long-term asset class roles rather than short-term headlines. For diversified portfolios, the main implications are:
- UK equities continue to provide diversification through their lower correlation to global equities and different sector mix;
- Sterling weakness can support internationally exposed UK large caps through the translation of overseas earnings;
- The FTSE 100 should not be treated as a simple proxy for the UK economy, given its global earnings base;
- UK valuations remain attractive relative to many developed markets and could support long-term returns if sentiment improves, and;
- Large caps may be better insulated from domestic political uncertainty, while mid and small caps are more exposed to UK fiscal policy, consumer confidence and gilt yields.
Looking through the noise
“Our approach to UK equities is grounded in portfolio construction, not home bias. A measured UK allocation, focused on large cap indices, helps to diversify equity exposure, reduce dependence on mega-cap technology and retain access to a market that remains attractively valued – without taking on the troubles of more domestically focused UK small caps, an area traditionally part of a portfolio with a home bias.
“UK political headlines may remain unsettled, with markets watching the leadership process, the next chancellor and any signals on fiscal policy in the months ahead. But investors should be wary of allowing political noise to dominate long-term investment considerations.
“UK equities are not a pure play on Westminster. The large cap market is global, diversified and sensitive to currency moves, while the broader market’s valuation discount and differentiated sector mix continue to support its role in diversified portfolios.
“The near-term headlines may be uncomfortable, but the portfolio case for large cap UK equities remains intact.”
