Foreign Funds Flock Back: FTSE 100 Outpaces Europe & US

Britain's stock market, particularly the FTSE 100 index, is experiencing a resurgence in appeal among foreign investors, marking a potential reversal of years of underperformance relative to European and U.S. counterparts. Despite ongoing economic challenges, this shift is attributed to factors such as a recent UK-U.S. trade agreement, regulatory easing, undervalued assets, and robust dollar-denominated returns.

Key drivers include the FTSE 100's year-to-date gain of nearly 10%, surpassing the STOXX 600's 7.5% increase and achieving six consecutive weeks of outperformance, the longest period since late 2022. In dollar terms, the index has risen approximately 18% in 2025, its strongest performance since 2009, compared to a 6% advance for the S&P 500. The pound's 7% appreciation against the dollar this year, nearing a four-year high, has not deterred investors, as around 80% of FTSE 100 revenues derive from overseas markets, providing a buffer against currency strength. Additionally, the UK's forward price-to-earnings ratio of 12.5 remains competitive, higher than in the past five years but below the STOXX 600's 14.11 and well under the S&P 500's 23, highlighting a valuation discount that has narrowed from historical levels.

Policy developments further support this trend, including new capital market regulations and encouragement from Chancellor Rachel Reeves to foster a more positive narrative around UK equities. The UK-U.S. trade deal mitigates uncertainties, contrasting with potential 30% tariffs facing the European Union if no agreement is finalized by August 1, 2025. Sectoral strengths, such as defensive stocks in pharmaceuticals (e.g., AstraZeneca) and retail (e.g., Tesco), alongside resource firms like Anglo American and BP benefiting from elevated oil, copper, and gold commodity prices, enhance the index's resilience.

Net outflows from UK equities totaled $20 billion in 2025, exceeding Europe's $13 billion inflows, though these outflows have nearly halted in the past month, signaling stabilizing investor sentiment. Experts note a return of institutional investors, including non-UK endowments and pension funds previously underweight post-Brexit. Justin Onuekwusi, Chief Investment Officer at St. James's Place, observed signs of major asset allocators re-engaging with the UK market. Dan Coatsworth of AJ Bell described it as a "calming cup of tea" in an uncertain global environment. At the same time, Michael Stiasny of M&G Investments suggested the market is in the early stages of unwinding its discount relative to the U.S.

Historical context traces the underperformance to the 2016 Brexit vote, which reduced listings and merger activity amid political instability. However, counterpoints include the pound's strength potentially pressuring exporters if sustained, and broader economic slowdown risks, with some analysts like Sebastian Raedler of Bank of America viewing the 2% outperformance as modest amid larger global narratives.

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