The UK stock market is mired in difficulties: the FTSE 100 has risen 7% in a year, lagging behind Europe, and the Labour Party struggles to alleviate multiple pressures

According to Zhitong Finance APP, a year ago the Labour Party came to power with an overwhelming advantage in the elections, bringing political stability and investment opportunities to the UK, but its domestic stock market remains mired in difficulties. Since the new government led by Keir Starmer took office, returns for stock investors have continued to be weak: the FTSE 100 index has only risen by 7%, in stark contrast to the 17% to 27% increases of benchmark indices in Germany, Spain, and Italy during the same period. Even more concerning is that the current growth momentum has shown signs of fragility—market confidence in the Labour Party's ability to stimulate economic growth without exacerbating fiscal pressures is lacking, and expectations for tax increases or expanded government borrowing are heating up, further prolonging the pressure cycle in the UK bond market. Coupled with the Bank of England's cautious stance on interest rate cuts, investors' doubts about the UK economy and stock market outlook are hard to dissipate. Figure 1 Thomas Schüssler, co-head of global equities at DWS Group, a subsidiary of Deutsche Bank, pointed out: "The government's maneuvering space is limited, with constraints on fiscal capacity and investor tolerance." Although UK stock market valuations have improved this year, the starting point is low: the price-to-earnings ratio of the FTSE 350 index has risen from 11.4 times at the beginning of the year to 13 times, still about 35% lower than the MSCI global index, making it one of the cheapest stock markets among developed markets. However, further upward movement in valuations relies on improvements in earnings growth, while high borrowing costs are becoming a key obstacle—markets expect the Bank of England to cut interest rates only three times in the next year, with rates remaining at 3.5%, which is double the expected rate in the Eurozone. Florian Illy, macro head at Geneva-based Longo Investment Management, analyzed: "Under significant fiscal uncertainty, the narrative in the UK market is centered around interest rates." He emphasized the increasing political and economic uncertainty and pointed out that the rise in the London stock market is "weak due to a lack of valuation expansion support as yields rise." The "asymmetric risk environment" created by the Bank of England is particularly tricky: long-term interest rates have a downward floor but no clear upper limit, "if global economic growth does not significantly deteriorate, this structure will continue to suppress UK assets." Figure 2 This pressure affects both the large-cap stocks in the FTSE 100 index and the domestic small and mid-cap stocks. The upcoming earnings season will be a key window to test whether companies can break through the headwinds of rising interest rates. Additionally, the significant appreciation of the pound may become a focal point in earnings meetings—about 75% of the revenues of FTSE 100 constituent stocks come from overseas, and this year the pound has appreciated by 9.3% against the dollar Bloomberg industry research strategists Laurent Duhé and Meng Kaidi pointed out that the upside potential for the FTSE 100 index valuation is limited. According to their fair value model, the market has priced in expectations for three interest rate cuts by the Bank of England (with a price-to-earnings ratio of 12.7 times in the first half of 2026), and this valuation is slightly elevated based on historical levels of Brent crude oil at $70 per barrel. Given the high proportion of U.S. income in the FTSE index, a stronger pound may further squeeze small-cap stock returns. Figure 3 In addition to challenges related to interest rates and exchange rates, the UK market also faces issues such as insufficient liquidity, excessive regulation, and a lack of enthusiasm among domestic investors for stock allocation. As more companies consider relocating their listings, the scale of the UK stock market continues to shrink—this week, there were reports that AstraZeneca, the largest company by market capitalization in London, is evaluating a move to list in the U.S., and the IPO market's downturn is still worsening. Institutional investor sentiment remains lukewarm: A June Bank of America fund manager survey showed that global investors have net reduced their holdings in UK assets by 4%, unchanged from May; Citigroup's strategist team (led by Beata Manthey) has downgraded the UK's rating from "overweight" to "neutral," stating that "the UK was once an effective geopolitical risk hedge, but current earnings growth is weak and valuations are no longer extremely cheap."