UK stock market lags Wall Street and European peers a decade after Brexit, Morningstar analysis finds

Almost ten years after the June 23, 2016 referendum, when UK voters chose to leave the European Union, the FTSE 100 has been reaching new highs. Yet the lasting impact of Brexit on the UK financial market remains visible in both equity performance and currency moves.

Brexit’s drag on UK equities

Morningstar’s new analysis, The Brexit Decade, finds that the UK stock market has lagged significantly behind Wall Street and major European markets over nearly a decade.

Since the Brexit vote, net fund outflows from UK equity funds have totaled roughly $160 billion. Outflows have continued for six consecutive years, a pattern Morningstar says points to a structural erosion of confidence rather than a short-term cyclical adjustment.

Despite the FTSE 100’s recent record run, the index’s long-term growth has been modest. Since Brexit, the FTSE 100 is up 62%, which Morningstar translates to a compounded annual growth rate of less than 5% per year.

By comparison, the US benchmark S&P 500 rose 253% over the same period, equivalent to about 13.4% annualized—nearly three times the pace of growth for UK large-cap stocks.

UK underperformance versus Europe

The gap is also evident within Europe. Over the decade, Germany’s DAX rose 151% and the Euro STOXX 50 index rose 109%. Morningstar interprets this as evidence that after Brexit, the UK market faced greater pressure and a weaker recovery than many other major European markets.

Cause and development: amplified weaknesses

Morningstar says Brexit acted as a catalyst that amplified pre-existing weaknesses rather than being the sole root cause. Before the 2016 referendum, the UK stock market faced structural headwinds, including weakening demand from domestic pension funds for UK equities and a shift of global capital toward US growth stocks.

The UK’s sector mix was also less favorable for the 2010s rally. The FTSE 100 was heavily weighted toward energy, banks, and mining, rather than technology platforms that led global stock market gains during that decade.

After the referendum, investors increasingly viewed the UK market as riskier at the same time global capital was flowing into US growth—particularly technology—companies with strong profit visibility and leadership of the 2010s rally.

Morningstar also notes that the UK’s share of global equity indices (such as the MSCI ACWI) fell from about 10% two decades ago to around 4% today. Even among UK-domiciled asset-allocation funds with the highest risk appetite tracked by Morningstar, the weight of UK equities declined from about 40% to 18%. Those funds also shifted toward passive index funds over active managers selecting individual stocks.

The pressure on the UK market was further amplified by multiple shocks, including the Covid-19 pandemic, global inflation, geopolitical tensions, shrinking foreign direct investment, weaker goods exports, and domestic policy shifts. Morningstar highlights the autumn 2022 UK government bond market turmoil as a notable episode.

Currency impact: the pound’s post-Brexit decline

Morningstar links Brexit’s lasting impact to the currency market as well. Since the 2016 vote, the pound has fallen about 10% versus the USD and about 12% versus the euro. Before the referendum, one pound bought about 1.31 euros; nearly ten years later, the rate is around 1.15 euros.

The pound has also weakened further against some Central and Eastern European currencies. Morningstar points to the pound’s reaction against the Czech koruna and the Polish zloty as suggesting those economies have captured some production and foreign investment that the UK could have received if not for Brexit.

Even against relatively weak and volatile currencies, Morningstar characterizes the pound’s performance as modest.

Market threshold: signs of a rebound since 2022

Morningstar says that since 2022, UK equities have performed better than both the US and global markets. The rebound has been supported by renewed investor interest in value stocks—shares trading below fundamental value—and relatively stable dividend yields.

However, Morningstar notes that the rally has not yet significantly changed how investors price UK equities. UK stocks still appear to trade at relatively cheap valuations versus many other developed markets. Using a common metric (P/E), Morningstar estimates UK equities are roughly 30–35% cheaper than the US.

Where the market remains most discounted

Morningstar says the hardest hit have been small and mid-cap stocks—companies with market capitalizations smaller than FTSE 100 leaders. These stocks are priced well below their long-term averages and much cheaper than peers in other developed markets.

Still, there are signs of continued appeal. Morningstar reports that M&A activity has risen, and many companies have boosted share buybacks to record levels. This suggests corporate leadership and foreign investors still see value in the UK market, even as some investors remain cautious.

Expert views: valuation opportunity versus lack of growth drivers

Some fund managers argue that low valuations could create buying opportunities. Natalie Bell, a fund manager at Liontrust Asset Management, says UK equities remain significantly cheaper than their long-term averages and cheaper than global peers. She added that if investor sentiment improves, UK equities could reprice more broadly, with the clearest opportunity in small- and micro-cap stocks, though she cautioned that timing and magnitude are difficult to predict.

Other experts are more cautious. Mislav Matejka, JPMorgan’s head of global equity strategy for Europe, argues that UK equities often do well when other markets are bleak because the FTSE 100 is relatively defensive and highly liquid, with many large firms in essential sectors.

Matejka forecasts the UK stock index could rise 5–10% in 2026, but he does not recommend increasing exposure. He says the UK market still lacks a clear growth driver, while drivers appear in Germany or China.

“Nearly ten years after Brexit, the question for international investors is no longer whether the event harmed the UK market. What matters now is whether UK stocks are cheap enough to become a buying opportunity,” Matejka said.