Octopus Investments

The great British exodus creates a valuation vacuum A decade of relentless capital flight has left the London Stock Exchange in a peculiar position. Domestic investors have withdrawn approximately £71 billion from UK equity funds over the last ten years, including a staggering £20 billion in 2024 alone. This mass liquidation, driven largely by a structural shift toward US-heavy passive indices and lingering Brexit fatigue, has compressed valuations to levels historically reserved for systemic crises. We are currently witnessing a decoupling of price and performance. While the FTSE 250 and various small-cap indices trade at forward price-to-earnings ratios reminiscent of the 2008 financial crisis, the underlying businesses are often far healthier. Unlike the Great Financial Crisis, where the survival of the banking system was in doubt, today's UK economy is demonstrating quiet resilience. In the first half of 2025, the UK emerged as the fastest-growing G7 economy with a 2.2% annualized GDP expansion, outstripping both the US and the Eurozone. Smart money flows from the West While domestic retail investors have been yanking capital out of the UK to chase the S&P 500 at record highs, sophisticated international players are moving in the opposite direction. Schroders reports that American investors allocated $15 billion to UK equities in early 2025—more than they committed to any other overseas market. This "smart money" is attracted by a 40% valuation discount compared to global peers. Warren Buffett famously advised being greedy when others are fearful, and the current sentiment in the UK is undeniably fearful. The irony is that the FTSE All-Share actually outperformed the S&P 500 in sterling terms during 2025, yet the prevailing narrative remains one of decline. When foreign buyers see high-quality companies trading at deep discounts, they don't just buy shares; they buy the whole company. Takeover frenzy signals deep intrinsic value The most definitive proof of undervaluation is the current surge in corporate acquisitions. In the first half of 2025, there were 41 firm offers for UK-listed companies, the highest volume in over 15 years. Trade buyers and private equity firms are routinely paying premiums of 34% over market prices and still view these assets as bargains. From a wealth management perspective, this creates a shrinking market. Companies are being delisted faster than they are being replaced, which effectively forces a supply-side squeeze. When Nuveen acquires Schroders for $13.5 billion, it serves as a massive signal that Britain's largest standalone asset managers are seen as undervalued by their American counterparts. Finding growth in the small-cap shadows The most significant opportunities often hide where the fewest people look. While the FTSE 100 is dominated by global multinationals, the AIM and FTSE 250 represent the true backbone of the British economy. Analysis from Octopus Investments suggests that the AIM All-Share is poised to post higher profit growth over the next two years than the tech-heavy Nasdaq. Prudent investing requires looking past the "garbage" to find resilient businesses with strong free cash flow. In the small-cap space, analyst coverage is sparse, with many firms having fewer than six professionals tracking them. This information gap leads to mispricing, creating an entry point for those willing to do the homework. Sustainable growth is rarely found by following the crowd into overvalued tech giants; it is cultivated by identifying value where others see only risk.