UK Equities: Capitalizing on the Nine-Month High in Business Confidence

The UK's economic outlook is brightening, driven by a nine-month high in business confidence, as measured by the Lloyds Business Barometer. While the survey does not confirm a “nine-year high,” the May 2025 reading of 50%—matching the peak of August 2024—signals a critical rebound after April's 10-point slump. This surge, fueled by easing global trade tensions and recovering financial markets, presents a compelling case for strategic allocations to construction, services, and small/mid-cap equities, which are undervalued but poised to benefit from sector-specific optimism.

Construction: A Sector on the Rise

Construction confidence hit a nine-month high of 56% in May 2025, outperforming all sectors except services. This recovery reflects strong demand for infrastructure projects and improved trading prospects, with the East Midlands—a key construction hub—reporting a seven-year high in confidence (66%). Historically, construction confidence spikes correlate with equity outperformance, as seen in May 2024 when a 58% confidence reading preceded a 6% rise in construction-focused ETFs like FTSE Construction & Materials.

Investment Opportunity:
- Infrastructure plays: Companies like Costain Group (COST) and Carillion (now part of FCC Construction) could benefit from government-backed projects in renewables and transportation.
- Regional exposure: Focus on firms operating in high-confidence regions like the East Midlands and North East, where confidence rose to 65% in May.

Retail: A Buying Opportunity in the Dip

Retail confidence fell to 40%—its lowest since January 2025—amid rising inflation and shifting consumer habits. Yet, this dip may mask undervalued opportunities. Historical data shows that retail equity recoveries often outpace the Barometer's rebound. For instance, after a similar dip in April 2024, retail stocks like Next (NXT) and M&S (MKS) rebounded 12% within three months as trading prospects stabilized.

Investment Strategy:
- Quality retailers: Prioritize firms with strong e-commerce capabilities (e.g., Boohoo (BOH)) or niche markets (e.g., DS Smith (DSM) for packaging solutions).
- Dip buyers: Use the current dip to accumulate stakes in undervalued regional retailers, as confidence tends to rebound sharply from low levels.

Services: The Engine of Growth

The services sector hit a one-year high of 54% in May 2025, driven by strong trading prospects and hiring intentions. This sector—comprising healthcare, tech, and financial services—is a bellwether for broader economic health. The East Midlands and North East saw services confidence hit 66% and 65%, respectively, signaling regional economic resilience.

Historically, services confidence surges have preceded equity gains. In March 2024, a 57% confidence reading coincided with a 9% rise in the FTSE 100 Services Sector.

Investment Play:
- Tech-enabled services: Invest in firms leveraging automation and AI, such as Sage Group (SGE) and Reed Elsevier (REL).
- Healthcare and education: Sectors like Bupa (BUPA) and Pearson (PSON), which benefit from sustained demand.

Macroeconomic Validation

The IMF's upgraded UK GDP forecast to 1.2% for 2025 and easing inflation (3.5% in April 2025 vs. 4.1% in late 2024) further support the case for near-term gains. The FTSE 250, which includes small/mid-caps, has underperformed the FTSE 100 by 5% over the past year, creating a valuation gap. With 46% of businesses planning market expansion and 42% investing in AI/automation, now is the time to pivot toward growth-oriented equities.

Risk Considerations & Portfolio Construction

• Construction: Favor companies with diversified revenue streams and exposure to government contracts.
• Retail: Avoid over-leveraged firms; focus on those with strong balance sheets and digital agility.
• Services: Watch for sector-specific risks like wage pressures, but prioritize firms with pricing power.

Final Call: Time to Rebalance

The Lloyds Barometer's rebound confirms that UK businesses are optimistic about their future. While retail faces near-term headwinds, its cyclicality offers a compelling entry point. Construction and services, backed by strong regional data and macro tailwinds, are prime candidates for strategic allocations. Investors should consider:
1. Sector ETFs: iShares UK Construction (EXUK) and Vaneck Global Services ETF (VISV).
2. Small/mid-caps: FTSE 250 exposure via iShares FTSE 250 UCITS ETF (I250).
3. Dividend plays: BT Group (BT.) and National Grid (NG), which offer stability amid sector growth.

The UK equity market is at an inflection point. With confidence-driven growth and a supportive macro backdrop, now is the time to capitalize on overlooked opportunities in construction and services—and position for a rebound in retail.

Stay vigilant on geopolitical risks (e.g., US-China trade tensions) and monitor the Bank of England's rate decisions. Diversification and a long-term lens will be key to navigating this recovery.