Morningstar believes the UK market is a hidden gem for investors, highlighting its low valuations and the Bank of England’s ability to cut interest rates in its Global Outlook for 2026 report.
UK stocks delivered 20% gains in 2025, among the best globally, yet negative media headlines continue to hold back investors from taking meaningful positions in UK assets, according to Morningstar. Fund flow data shows persistent outflows from UK equity funds throughout 2024 and 2025.
The research house notes that UK equities trade at a price-to-earnings ratio of just 14x, approximately half that of the US, while offering dividend yields that exceed other G7 markets.
From an economic perspective, Morningstar expects meaningful monetary easing throughout 2026 and beyond as labor market conditions cool. With economic conditions getting gloomier by the day, the Bank of England now has greater scope to lower interest rates, which should help put the economy back on track. They expect that lower interest rates will help growth return to its trend pace of around 1.7% in the coming years.
“With economic slack widening, the Bank of England has scope to cut interest rates meaningfully in 2026 – with the full extent of monetary easing not fully priced into money markets, in our view,” explained Grant Slade, Economist at Morningstar.
“With meaningful cuts to public spending unlikely in next week’s budget, we think the UK’s debt metrics are unlikely to materially improve in coming years. Still, we think some of the negativity surrounding the UK’s fiscal profile and its likely impact on medium-term economic performance is overdone.”
UK small-cap stocks remain one of the most undervalued segments, attracting interest from corporate and private equity buyers. Morningsta highlights recent examples, including Carlsberg’s acquisition of Britvic and Thoma Bravo’s takeover of Darktrace.
Morningstar also drew attention to the UK housing sector as offering value, with builders such as Persimmon, Barratt Redrow, and Taylor Wimpey trading at attractive levels. Any reduction in interest rates should act as a meaningful tailwind for the sector, the firm notes.
Looking at gilts, UK government bonds have suffered from concerns about fiscal stability, but Morningstar suggests that much of the weakness stems from liquidity and supply-and-demand dynamics.
Interestingly, demand from defined-benefit pension buyers has fallen by around 50% in recent years, creating a roughly 40 basis points premium in 10-year gilt yields relative to fair value.
For long-term investors, locking in this yield could prove rewarding as markets reprice to reflect normalized conditions, according to the report.