Building on the UK market’s robust performance in 2025, conditions are now turning more favourable as we look ahead to 2026. The UK is forecast to see continued interest rate cuts throughout next year driven by waning wage pressures. Critically, the November 2025 Budget avoided inflationary tax hikes and included a National Living Wage hike that was significantly lower than recent years and in line with, rather than ahead of, broader market increases. Falling inflation should drive more rate cuts and reduce the expected terminal interest rate. The UK has suffered from a higher cost of capital than its peers for a number of years; a decline in financing costs throughout 2026 should provide a meaningful tailwind for UK domestic, mid-caps, two areas in which the portfolio is significantly overweight.

Building on the UK market’s robust performance in 2025, conditions are now turning more favourable as we look ahead to 2026.

Tax hikes are accompanied by the inevitable downgrade in growth forecasts. However, the UK is still forecast to grow in the top half of the G7 countries in 2026 and UK real incomes are forecast to be positive. The UK has faced a brutal multi-year mortgage refinancing headwind which should burn out in 2026. This, alongside lower savings rates, should naturally channel real income growth back into real income spending, supporting domestic demand and earnings later in the year.

The portfolio is cheaper than the market, with better earnings growth, higher returns on invested capital and better balance sheets. This strong fundamental position should stand the portfolio in good stead for 2026.