Market Review 10th August 2026

Everything you need to know, Simplified!

Why are so many UK companies being bought out?

Summary

• UK mid and small caps outperformed as strong earnings, improving economic data and record takeover activity highlighted the valuation opportunity in UK equities

• Foreign buyers continue to target UK assets, with more than US$60bn of mergers and acquisitions (M&A) announced this year as overseas acquirers take advantage of depressed valuations

• Global growth remains resilient, led by the US, with recession risks still appearing low despite signs of moderation in the labour market

• China remains the notable weak spot, with recent PMI data highlighting ongoing challenges in the world's second largest economy

• Key risks remain in focus, including Middle East energy supply disruption, scrutiny of AI-related capital spending and the potential for a more hawkish (favouring higher interest rates) US Federal Reserve (Fed)

• Markets now look ahead to US inflation and UK GDP data, which will provide fresh insight into the outlook for interest rates and economic growth.

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Market Review

The departure lounge: UK plc

UK mid and small cap stocks outperformed last week gaining 2.4% while large caps rose 0.5%, as a confluence of M&A activity and a broadly positive domestic earnings backdrop drew investors into the ‘cheap’ smaller end of the UK market. 

The M&A backdrop was the defining feature of the week - and of the year. The UK has now seen over US$60 billion of takeover activity in 2026, with foreign and private equity buyers consistently drawn by a valuation discount that continues to make UK assets look cheap relative to global peers. The pace of dealmaking has accelerated to the point where UK takeover volumes are running some 250% above prior-year levels. 

The buyers are overwhelmingly overseas: US private equity, European strategics and Asian corporates. According to the ONS, the number of UK firms in foreign hands has risen 35% since 2020, with 6.6 million Britons now employed by foreign-owned companies - representing roughly one in five employees. 

The very valuation discount that has frustrated domestic investors for years is now acting as a powerful magnet for external capital, with Bloomberg describing the UK as a ‘departure lounge’. 

On a more positive note, underpinning the index move was also a busy and broadly constructive half-year reporting season. Across the domestically-oriented mid-cap universe, the tone of results was solid; companies in housebuilding, retail, insurance and financial services generally met or beat expectations, with several upgrading full-year guidance. The one-year forward price/earnings multiple for UK mid and small caps stands at 11.6x, compared with 18.6x for global equities.

Strong UK economic data was the final trifecta of support for domestic equities. The July Services PMI rebounded sharply to 52.1 from a contractionary 48.8 in June, lending credibility to the more optimistic earnings outlooks being set by management teams. 

The earnings and economic data suggest that the UK economy is in better shape than the persistent valuation discount implies - a message that overseas acquirers appear to have received more clearly than the public market.

Fresh global economic insights support our growth thesis

Economic activity remains robust, with the US continuing to lead global growth. Last week's data confirmed broad-based expansion. US ISM Manufacturing rose to 55.6 in July, its highest level since May 2022 and a seventh consecutive month of growth, while the Global Composite PMI climbed to 52.6, its strongest reading since February. Consumer spending, corporate profitability and labour markets remain supportive of continued expansion, leaving recession risks relatively low. The one notable exception was China where PMI data was significantly weaker than anticipated with the composite index falling to 50.8 from 53.6. The Chinese economy has struggled with persistent sluggish growth for over three years.

While global recession risks remain low, labour markets bear closer watching. Friday's July US nonfarm payrolls report surprised to the downside, with employers shedding 23,000 jobs against expectations of an 83,000 gain, while prior months were revised lower by a combined 103,000 positions. While hiring came in below expectations, unemployment fell to 4.1%. Some of the weakness reflected temporary factors and recent US government job cuts, leaving the overall picture one of gradual moderation rather than deterioration.

While the growth backdrop remains supportive, several risks warrant monitoring. The situation in the Strait of Hormuz remains unresolved. A deal between Iran and Oman is reportedly close, but key conditions, including sanctions relief, remain outstanding. Strategic petroleum reserve releases have helped cushion the impact of higher energy prices to date, but this is finite and a prolonged disruption would increase the risk of tighter energy markets particularly ahead of the Northern Hemisphere winter.

As discussed in last week's note, the AI investment cycle also continues to attract scrutiny. Hyperscaler capital expenditure remains at historically elevated levels, with investors increasingly focused on the return generated from that spending and the sustainability of the cycle. Last week saw the AI trade bounce back but it remained volatile with a severe mid-week rout particularly in Asian ‘memory’ technology stocks.

Finally, stronger growth and persistent inflation pressures have increased the risk of a more hawkish policy path from the Fed. With no Fed meeting scheduled in August, investor attention will now turn to the Jackson Hole policy symposium, where policymakers have an opportunity to provide further insight into their assessments.

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The week ahead

US CPI inflation

Economists expect that inflation slowed in July to 3.4% with lower gasoline prices supporting the disinflation. Notably for the Fed however Bloomberg economists expect core CPI (excluding volatile food and energy) to have slowed to 2.4% the lowest since before the inflationary spiral in March 2021.

UK GDP

Economic growth in the second quarter is estimated at a fair 0.4%, slowing slightly from 0.6% in Q1. The UK economy is holding up given geopolitical events during the quarter. It is expected that consumer spending was boosted by the hot weather and the FIFA World Cup. Most economists see steady (‘slow and low’) economic growth in the second half of the year and through 2027.

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