A decade after Britain voted to leave the European Union, the country’s stockmarket still bears the scars, not all of them self-inflicted. A new report from Morningstar suggests that Brexit acted less as the origin of the UK market’s malaise than as an accelerant, hastening trends that were already under way.

In 2016, British equities were hardly in rude health. Structural weaknesses – an ageing sector mix, a scarcity of high-growth technology firms and a reliance on “old economy” industries – had already left the market trailing global peers. Brexit, argues Henry Ince, an analyst at Morningstar, arrived at a moment when “investor confidence was already fragile” and helped trigger a sustained exodus of capital.

The numbers are stark. Since the referendum, roughly $160bn has flowed out of UK equity funds. Domestic investors, once prone to a strong home bias, have reversed course with surprising speed.

Allocations to UK equities in sterling-denominated portfolios have fallen from around 40% to just 18%, replaced largely by exposure to American markets. What was once home bias has become, in Ince’s phrase, something closer to “home blindness”.

Passive investing has had its impact

Global benchmarks have reinforced the shift. The UK’s weight in the MSCI All Country World Index has halved over two decades, from nearly 10% to about 4%. For passive investors, this is not a judgement but a mechanism: as Britain’s share shrinks, so too must allocations. Capital has not vanished; it has simply been redirected, overwhelmingly towards the United States and into passive vehicles.

The consequences for the domestic asset-management industry have been severe. Since 2016, about 380 UK equity strategies have closed, compared with just over 200 launches. Each closure is, in effect, a commercial verdict. Fee compression, competition from passive funds and dwindling inflows have combined to make the business of active UK equity investing increasingly hard to sustain.

Brexit’s economic aftershocks

Brexit’s economic aftershocks have compounded the problem. Foreign direct investment has declined, with new projects nearly halving between 2016 and 2025. Trade frictions have weighed on exports, while some multinational firms have shifted operations to the continent to preserve access to the single market. Add to this the shocks of a pandemic, inflation and war, and the backdrop has been anything but benign.

Yet the story is not one of unrelieved decline. Since 2022, UK equities have quietly outperformed global peers. The reasons are prosaic but important: exposure to value sectors such as energy and financials, coupled with resilient dividends. In a world of higher interest rates, the qualities that once seemed unfashionable – cash generation, yield, low valuations – have regained appeal.

Even so, sentiment has not followed performance. British stocks continue to trade at a steep discount to their American counterparts, with price-to-earnings ratios 30–35% lower. Smaller and mid-sized companies are particularly depressed. The market appears to be pricing in a persistently gloomy outlook, even as underlying fundamentals like returns, dividends and buybacks, suggest something more robust.

Big investors see the value in UK share prices

Corporate behaviour tells a similar story. Elevated merger-and-acquisition activity and rising share buybacks indicate that insiders and overseas acquirers see value where public investors remain sceptical. Britain’s market, in other words, may be cheap for a reason, but perhaps not as cheap as sentiment implies.

Part of the explanation lies in structure. Over the past decade, global equity returns have been dominated by technology and other growth sectors. In America, technology alone accounted for roughly half of total returns between 2010 and 2025. In Britain, it contributed a negligible share. The UK’s heavy weighting towards commodities, banks and defensive industries left it ill-suited to a low-rate, growth-driven era.

That mismatch is now less pronounced. As interest rates have risen, the valuation premium once enjoyed by growth stocks has narrowed. Britain’s stodgier sectors look less like a handicap and more like a source of stability. The question is whether investors will notice.

Morningstar’s conclusion is cautiously contrarian. Brexit may have accelerated the UK market’s decline in popularity, but it did not fundamentally alter its underlying economics. If anything, the persistent pessimism now embedded in valuations may offer opportunity. The challenge is less about repairing the damage of the past decade than about persuading investors that Britain’s market still has a future.