The London stock market’s blue-chip FTSE 100 index has defied long-standing criticism, demonstrating resilience and renewed investor interest over the past year. After a decade of being characterized as a slow-moving market overly reliant on fossil fuels and banks, with limited exposure to technology and persistently trading at a discount to international peers, the index has delivered strong returns and attracted significant takeover activity.

In 2025, the FTSE 100 gained more than 21%, outperforming the S&P 500’s 16.6%. The index surpassed 10,000 points at the start of 2026 and set a new record by late February. Despite a recent increase in UK government bond yields, the index remains only about 4% below its peak. This improvement is partly driven by arbitrage activity narrowing the FTSE 100’s valuation discount. The index currently trades at approximately 12.7 times earnings, compared to 14.1 times for the MSCI Europe and 19.1 times for the S&P 500.

Takeover activity has accelerated sharply, with UK-listed targets attracting bids exceeding £172 billion in the first half of 2026—more than triple the total from the previous year. Foreign investors accounted for a record 85% of this amount, paying an average premium of around 45%. Recent bids for companies such as Segro, Schroders, Intertek, and Beazley illustrate that these are strategic acquisitions of profitable businesses, not distressed assets. Concurrently, UK company boards have responded by repurchasing shares at unprecedented levels, further reducing equity supply.

Dividend yields among FTSE 100 constituents remain among the highest in developed markets, making the index attractive for income-focused investors. On the demand side, several policy changes have shifted the behavior of traditionally cautious British investors. For instance, from April 2026, the cash ISA allowance for under-65s was reduced from £20,000 to £12,000, while the stocks-and-shares ISA limit remains at £20,000. Additionally, a 2% increase in tax on savings income aims to incentivize equity investments over cash holdings.

Significant pension sector reforms have also boosted demand for UK equities. The Pension Schemes Act 2026 seeks to channel more pension fund capital into domestic growth assets. Local government pension schemes have completed pooling initiatives, and 17 providers have committed to the Mansion House Accord, which unlocks substantial pension investments for UK assets, supported by a statutory backstop if voluntary allocations are insufficient. Since April, the Financial Conduct Authority’s targeted support regime has further encouraged household investment in equities.

The outlook for new listings on the London market appears cautiously optimistic as well. Although only £577 million was raised in the first half of 2026, up-and-coming companies like pan-African payments business Airtel Money have announced plans for initial public offerings (IPOs) in London. The market now offers a three-year stamp duty exemption for new listings, and index rules accommodate companies reporting earnings in foreign currencies, as exemplified by the inclusion of Athens-based Metlen in the FTSE 100.

However, challenges remain. Some planned IPOs have been delayed this year, and concerns persist that a wave of takeovers reducing the number of listed companies could undermine efforts to revitalize the market. The success of the reforms depends on the ability of new listings to outpace the rate at which firms are acquired and removed from the index.

Separately, the UK continues to face elevated borrowing costs compared to other advanced economies. UK 10-year government bond yields remain the highest among G7 countries, despite rising by only about 0.6 percentage points over the past year—less than the increases seen in Japan, France, the United States, Italy, Canada, and Germany. The legacy of fiscal concerns dating back to 2022, when then-Prime Minister Liz Truss’s unfunded tax cuts coincided with high inflation, is cited as a contributing factor to this so-called “premium.”

While the increase in UK borrowing costs has been relatively modest, the absolute level still puts pressure on the government’s annual debt interest payments, which exceed £100 billion. The outlook is further complicated by ongoing global economic uncertainty, including elevated fixed mortgage rates and sustained geopolitical conflicts that have triggered energy shocks.

The Office for Budget Responsibility’s (OBR) latest fiscal assessments highlight several moving parts. The rise in gilt yields is expected to reduce fiscal headroom by £6 billion to £7 billion from previous estimates, and defense investment plans include a £4.7 billion shortfall over four years. On the demographic front, net migration to the UK has declined, from 235,000 annually as projected in March to 171,000 reported for the previous year, though longer migrant stay rates partially offset this effect.

Despite these fiscal challenges, messaging from the Treasury suggests a preference for continuity over drastic budget tightening ahead of the October 28 budget. Chancellor John Healey appears willing to operate with narrower fiscal headroom than his predecessor, aiming to avoid unsettling financial markets amid ongoing global uncertainties. Whether this approach will satisfy critics remains to be seen.