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Yesterday’s (26 November) Autumn Budget has been framed as a potential turning point for the UK stock market. But will it finally close the valuation gap — or instead confirm why British shares remain discounted?
Let’s take a look at how it could affect markets going forward.
The valuation gap
UK shares trade at a roughly one-third discount compared to the MSCI World and nearly half versus the S&P 500 (based on forward earnings). The outlook from the Budget paints a picture of modest growth and rising taxes.
Real GDP growth is expected to average only about 1.5% annually, down from earlier forecasts due to weaker productivity. Productivity growth, a key driver of long-term earnings, has been revised down to just 1% in the medium term. Meanwhile, the tax burden is set to rise to an all-time high, exceeding 38% of GDP by 2030. This is driven largely by frozen personal tax thresholds and a raft of smaller tax increases.
This combination of slow growth and high taxes offers a mixed signal for UK shares. On one hand, tough fiscal policy backed by reduced borrowing and a modest budget surplus could reassure investors that the UK is finally getting its debt under control. That might lessen the UK’s financial risk premium, helping raise valuations at the margin.
On the other hand, weaker productivity growth and persistently high taxes could reinforce the UK’s ‘low-growth, high-cost’ image. Especially compared to the US, where higher trend growth supports higher valuations.
Simply put, this doesn’t look like a growth stimulus plan but rather a cautious strategy to reduce borrowing. For investors, that means a meaningful reduction in the valuation gap will likely require boosted productivity and business investment – factors that yesterday’s Budget is unlikely to improve markedly.
How can investors prepare?
With no windfall taxes on banks, finance is a key sector that could benefit. I believe this could pass down to insurance, so I’m particularly bullish about Aviva (LSE: AV.) — one of the largest life insurance providers in the UK.
The company has already delivered strong growth in 2025, with operating profit expected to reach £2.2bn, supported by its recent Direct Line acquisition. However, this also adds integration risk, as any delays or operational hiccups could pressure short-term profitability and increase expenses.
Still, the business is on track to achieve its 2026 targets a year early. Earnings per share (EPS) growth is expected to average 11% per year through 2028, with a return on equity (ROE) of over 20% by 2028. The company is also pushing a strategy of fiscal optimisation, aiming for more than 75% of its business to be capital-light by 2028.
Add to that a strong solvency position and consistent dividend increases, and Aviva looks like a resilient choice amid an uncertain macro outlook.
The bottom line
The Autumn Budget suggests a moderate impact on the valuation gap of UK shares. The growth outlook remains cautious, and the tax increases are likely to weigh on consumption and investment. As such, I think investors should temper expectations for a rapid catch-up.
At the same time, a measured improvement of fiscal credibility could be enough to prompt some narrowing of the gap. As always, strategic stock selection and portfolio diversification are key to navigating this period of economic uncertainty.
