The backdrop remained challenging for UK investors during May, and sentiment was damped by persistent geopolitical tensions, rising domestic political uncertainties, a wider focus on AI-related stocks, and concerns over inflationary pressures.
- UK mid-caps outperformed blue-chips in May
- Inflation eased to 2.8% YoY in April
- 75% of UK businesses expect higher energy costs
Multiple headwinds: the backdrop remained challenging for UK investors during May, and sentiment was damped by persistent geopolitical tensions, rising domestic political uncertainties, a wider focus on AI-related stocks, and concerns over inflationary pressures. The FTSE 100 Index edged 0.3% higher, while the FTSE 250 Index rose by 4.3%. The yield on the benchmark gilt rose as high as 5.19% during the month. Meanwhile, the price of Brent crude oil rose as high as US$115 in May, but ended the month at US$92.
“The geopolitical landscape has been shaken and there’s no quick fix” (BCC)
Iran impact: research from the British Chambers of Commerce (BCC) found that 80% of UK businesses reported an existing or expected impact from the Iran conflict, while 75% expected higher energy costs over the next year. The BCC commented: “The geopolitical landscape has been shaken and there’s no quick fix.”
An uncertain outlook: the International Monetary Fund (IMF) upgraded its forecast for UK economic growth this year from 0.8% to 1%, but cautioned that activity could be undermined by both global and domestic uncertainty. The IMF believes that holding interest rates for the rest of 2026 “should be sufficient to bring inflation back to target by end-2027”. The UK economy expanded by 0.3% during March.
Inflation eases in the short term: the annualised rate of consumer price inflation fell from 3.3% in March to 2.8% during April – its lowest level in over a year – dampened by government measures to reduce energy bills. Looking ahead, however, inflationary pressures are considered likely to gather pace in response to an expected rise in household energy bills.
Cost of living: retail sales volumes dropped by 1.3% during April, and the British Retail Consortium warned : “Discretionary spend is likely to drop further as the cost-of-living squeeze worsens.” Elsewhere, Chancellor of the Exchequer Rachel Reeves unveiled the government’s “Great British Summer Savings” – a package of measures including VAT cuts on children’s food, travel, and entry to attractions such as theme parks.
Mid-cap dividend growth: UK dividends rose at a headline rate of 21.1% to 16.4 billion during the first quarter of 2026, boosted by sterling’s weakness and £3.3 billion-worth of one-off special dividends. According to Computershare’s Dividend Monitor , dividends climbed by 1.1% to £13.2 billion on an underlying basis. Payouts from the FTSE 250 Index rose by 5.9% during the period, compared with growth of 0.9% from the FTSE 100 Index.
