UK Sector Review – IMF downgrades growth

Out of all the G7 countries (UK, US, Canada, France, Germany, Italy, Japan) the IMF have downgraded the UK’s growth expectations for 2026 and 2027 the most.

In 2026 they expect the UK economy to grow just 0.8%, half a percent lower than previously expected. They believe the UK is structurally more exposed to higher oil prices, which have significantly increased since the start of the Middle East Crisis.

We’re already seeing the effects of this at the pumps, but businesses will also be feeling the cost and will likely be paying higher prices for transportation and manufacturing. Prices that could be passed on to the consumer.

If energy prices stay elevated it’s expected this will hit UK inflation throughout the rest of the year. Despite inflation being at 3.3% for March, expectations are that, due to higher oil prices, it will rise to nearer 4% by the end of the year.

How will this affect interest rates?

With growth looking weaker due to the war, typically the Bank of England (BoE) would look at potentially lowering interest rates in an attempt to boost growth and kickstart the economy.

But with inflation still above target and likely heading in the wrong direction, the BoE will be reluctant to lower interest rates in case that causes more pressure on inflation.

Before the war, some predicted the BoE could potentially cut interest rates four times in 2026. But this has now changed and it’s possible there will be no cuts and even potentially more rises.

This article isn’t personal advice. If you’re not sure an investment is right for you, ask for financial advice. Investments can fall as well as rise in value, so you could get back less than you invest.

How has the UK stock market performed?

The last 12 months have been positive for UK markets. However, the beginning of 2026 has been very volatile following the Iran War. So there continues to be notable dispersion between different areas of the market.

The FTSE 100, representing the biggest UK companies, grew 22.63%* over the last year. This comfortably beat both the FTSE 250 ex Investment Trusts and FTSE Small Cap ex Investment Trusts indices, which returned 12.51% and 13.04% respectively.

This is a useful reminder that the stock market can perform differently to the economy. The FTSE 100 contains companies carrying out business all over the world, so are less reliant on a strong UK economy to succeed. As always, past performance isn’t a guide to future returns.

There was also a stark difference in performance between growth and value companies, with the latter outperforming significantly. For value investors, banks continued their strong run with elevated interest rates. Oil and gas companies also performed well, more recently benefiting from the higher oil prices caused by the conflict.

How have the UK Wealth Shortlist funds performed?

Our Wealth Shortlist selections delivered mixed performance over the past year, and we tend to expect this from such a wide range of funds.

Investing in these funds isn’t right for everyone. Investors should only invest if the objectives align with their own, and there’s a specific need for that type of investment. Investors should understand the specific risks of a fund before investing, making sure any new investment forms part of a long-term diversified portfolio.

For more details on each fund, its charges and specific risks, see the links to their factsheets and key investor information.

UK Growth

The top performing UK Growth fund on the Wealth Shortlist over the past year was the L&G UK 100 index.

The fund provides a low-cost and straightforward way to invest in the FTSE 100. Legal & General have been running passive funds for over 30 years and are one of the UK’s largest providers of such funds. The team’s process, combined with low charges, should help the fund to efficiently track the index.

The fund participates in securities lending, which adds risk.

The weakest performer was Aegon Ethical Equity.

Managed by longstanding manager Audrey Ryan since 1999, the fund invests in UK companies using an 'exclusions-based' approach – it doesn’t invest in companies involved in activities deemed unethical.

Related article

Exclusion-based investing – where do investors draw the line?

Tara Irwin

Senior ESG Analyst

Given the fund excludes large parts of the market, performance at times can look very different to the benchmark and peers. Recently the fund has had no exposure to several sectors that have done well, including defence companies like Rolls Royce and energy companies like Shell and BP.

The fund invests in smaller companies which adds risk.

UK Equity Income

Artemis Income was the best performing of the UK equity income funds on our Wealth Shortlist over the last year. The fund is managed by Adrian Frost, Nick Shenton and Andy Marsh.

The managers aim to outperform the FTSE All-Share over the long term through mainly investing in larger companies, while providing a growing income and a dividend yield above that offered by the index.

We have a high level of conviction in all three experienced co-managers, who have been investing through good times and bad, and we regard them as one of the best teams in the business.

The weakest of our UK Equity Income selections was Troy Trojan Income.

The fund tends to be concentrated with between 35 and 50 investments, which means each one can have a meaningful effect on performance – though this approach increases risk.

We expect the fund to hold up better than the index in falling markets given its focus on quality, but we don’t expect it to perform as strongly as the index in a rising market.

Both funds take charges from capital, which could boost income, but reduces the potential for capital growth.

UK Small & Medium Sized Companies

The strongest performer in the UK Small and Medium-sized section of the Wealth Shortlist over the past year was the HSBC FTSE 250 index fund.

It offers a simple, low-cost way to track the FTSE 250 and is run by HSBC, a provider of index trackers for over 35 years. The fund’s low charges should continue to help it track the index closely.

The fund invests in smaller companies and participates in securities lending, both of which add risk. The FTSE 250 includes several investment trusts, some of which invest in higher-risk emerging markets.

The worst performing of our selections in the sector was Artemis UK Smaller Companies.

The fund aims to grow an investment over the long term by investing in the smaller parts of the UK stock market. Our analysis suggests that over the last 12 months, the fund’s investments in technology and communication companies have been particularly painful.

Investing in smaller companies is higher risk and investors should invest for the long term and be prepared for volatility along the way.