Investing.com - The UK stock market has been riding high of late, but Capital Economics expects the country’s equities to underperform non-US global equities over 2025.
The FTSE 100, the UK’s benchmark stock index, recently hit an all-time high, but this is not as impressive as it sounds, analysts at Capital Markets said, in a note dated Feb. 6., as a weaker sterling exchange rate has flattered the FTSE’s performance in local-currency terms as a large share of firms in the index earn significant revenue overseas.
A weaker pound pushes overseas revenue higher in pound terms. In dollar terms, the FTSE 100 is still down by around 2% since peaking in early October.
Indexes of shares of smaller companies, which typically earn less of their overall revenue overseas, have performed poorly over the past few months even when factoring in their recent rally.
The common-currency performance of UK equities has also been aided by the UK not being as exposed to tariffs as other economies.
US President Donald Trump is likely to place a 10% universal tariff on all US good imports, Capital Economics said, but the UK’s heavy focus on services rather than goods means that it is likely to be less affected than other economies.
That said, Capital Economics expects UK equities to underperform non-US global equities generally in common-currency terms over the rest of 2025.
The UK economy looks to have lost all momentum in late 2024, and early signs this year suggest that things may have taken a turn for the worse.
Additionally, the UK stock market doesn’t appear to be well placed to benefit from enthusiasm about AI, which it expects to grow.
Capital Economics suspects the UK stock market will be weighed down by its relatively large weighting of energy and materials stocks, while sterling is likely to weaken against most developed market currencies this year.