UK Equity Income: ‘Times of stress and concern sees opportunity at its highest’

UK Equity Income Bulletin – October 2025 by Clive Beagles and James Lowen, senior fund managers of the UK Equity Income Fund at J O Hambro Capital Management

Economic Developments

There has been a lot of speculation regarding what will be in the Budget on 26th November, much of it kite-flying by various think tanks. As was the case last year, much of this, e.g. wealth taxes, will remain on the cutting-room floor. The speculation itself though is potentially damaging as it impacts confidence as we go through these pre-Budget macerations. In this respect, it is positive that speculation has died down in the last couple of weeks, and the Labour Party appear to have had a robust conference. Thus far, our UK consumer-facing holdings seem to indicate that September has been relatively strong vs the summer (e.g. DFS, Wickes), which is a good anecdote, as we pass through the period leading up to the Budget.

The Budget was set late, likely because Reeves wanted to have the October inflation data in hand when she stands up – this should show a welcome fall. We expect from c. 4% when September’s data is announced to c. 3.6% for October. We then expect this to continue to fall over the next 12 months, as base effects fall away, with a marked fall likely in April 2026 (by as much as 60bp) when the energy price cap increase from this year falls out of the denominator. Inflation should be closer to 2% by the end of next year, which will be a welcome change from a narrative perspective and more importantly in respect of the cost of living. It will also, of course, open the door to further interest rates cuts.

Reeves will have to raise taxes (or cut spending) in the Budget to rectify the gap that has arisen since the start of the year. In our view, the gap will be smaller than some of the figures being quoted in the press due to:

(a) GDP growth holding up. For example, the most recent year-on-year growth rate, announced at the end of September was c. 1.4%.

(b) Nominal GDP has also been revised up. In addition, the OBR, whilst potentially revising productivity estimates lower – which would increase the fiscal gap – may build in some of the other more positive developments that have happened in recent months and their impact on future growth e.g. trade deals and infrastructure spend such as Sizewell C.

We would advocate that whilst raising taxes, Reeves needs to be bold to drive growth and reduce tax complexity. Critical measures might include:

(a) removal of the triple lock on pensions, which would have a major impact on the fiscal arithmetic;

(b) reform property stamp duty to unlock transactional activity;

(c) some form of mandating on UK equity ownership in return for the considerable tax reliefs given for pension saving;

(d) and support for first time property buyers, potentially part-funded or backed by the UK banks.

Despite the negative commentary around the Budget, 10-year bond yields fell slightly during the month – by c. 5 bp to 4.7%, though they remain at the upper end of their year-to-date trading range. In contrast, US 10-year bonds fell slightly more, and are towards the bottom of their year-to-date trading range. This differential is somewhat odd given the US fiscal arithmetic looks, at the very best, delicately poised. Short term rates were cut in the US in September, which should help US and global activity. Sterling was stable vs the dollar across the month.

Outlook

Following the turbulence of ‘Liberation Day’, markets have begun to return their focus to the likely path of monetary policy and its impact on economic activity. In that respect, whilst Europe appears to have taken interest rates back towards their policy-neutral level, there is scope for both the UK and the US to ease policy substantially.

Large Cap equity indices, which globally have made new highs, have responded positively to this development, while the reaction at the stock and sector level has been far more schizophrenic. In fact, many of the more economically sensitive areas, such as industrials and consumer cyclicals have performed poorly over the last three months. In previous rate cutting cycles, they would have led performance. In the UK year to date, partly due to this, the FTSE 100 has outperformed small / mid cap stocks by c. 8%.

At the Fund level, some of our domestically orientated stocks have performed poorly in the last couple of months, as concerns about the UK government’s fiscal deficit have re-emerged. However, it is interesting that, in September, this was more nuanced with certain areas performing well, like the retail sector as noted above, whereas others, e.g. those linked to UK housing, remained sluggish.

Whilst we are not complacent about these concerns, we would note the UK is not a fiscal outlier in the G7. Solutions are also likely to become clear in the November Budget. We would also note that inflation is likely to fall as explained above – like ‘night follows day’ – next year as the drivers of this year’s increases (i.e. April energy price increase, government administered cost increases) fall away. This will allow interest rates to continue to fall in 2026. As this happens, we would anticipate a more vibrant consumer, given how strong personal balance sheets are, and a resumption of growth from the manufacturing and construction sectors.

This interest rate trajectory coupled with government policy initiatives e.g. on UK housing, should underpin weaker areas of the Fund. In our view, there is tremendous potential upside in holdings in this ‘bucket’ e.g. most of our small cap domestic holdings (DFS, Eurocell, Forterra etc) have an upside of 2-4x based on an exit multiple of 10-12x normalised earnings. 

We would also note, with history in our minds, that it is at times of stress e.g. Brexit, Truss etc when concern is at its highest, that opportunity is at its highest.

In this context, with vibrant (and upgraded) dividend growth evident in the Fund, low valuations and by and large strong operational performance, we remain confident in Fund performance as we move towards 2026.