This time (something) is different: why 2025 is the year to reassess U.K. markets

Published

April 2025

Investors tend to shudder at the words “this time is different”. As captured by Reinhart and Rogoff in their 2009 book of the same name, history shows us that financial folly usually begins when hubris meets supposed market opportunity.

As global trade and alliances face a new world order against a fluid policy backdrop, markets have whipsawed in response. The critical question remains: are things different this time?

U.K. markets have been caught in the crosscurrents of these roiling forces. In the opening days of 2025, 30-year Gilts tested levels not seen since 1998, only to do so once again during global trade tensions in early April. Initial commentary jumped straight to parallels with former Prime Minister Liz Truss’ mini-budget that spurred Gilts volatility in late 2022. Whilst the budget deficit is similar, U.K. Chancellor of the Exchequer Rachel Reeves argues the present situation is different because the current policy of fiscal expansion is designed to drive infrastructure investments that will transform the U.K. economy.

Reeves’ thesis is long term in nature and highly levered to economic growth forecasts. Economic forecasts are fiendishly difficult to build and even harder to monitor. What can be monitored, however, is the real-time insight that markets offer into investor confidence in the U.K. As the legendary value investor Benjamin Graham famously stated, “In the short run, the market is a voting machine, but in the long run, it is a weighing machine.”

The ‘voting machine’ is easily observed at ICE, the home of U.K. capital markets risk management. At ICE, our liquid pool of equity and fixed income derivatives referencing U.K. indices and benchmarks are actively used by institutions looking to allocate capital and manage risk dynamically.

U.K. equities: stability and opportunity in a shifting landscape

U.K. equity markets have remained stable in the face of strong global crosscurrents. The benchmark FTSE 100 is flat year-to-date* — outperforming U.S. benchmark indices that flirted with bear market territory in early April — after returning 5.8% in 2024. Meanwhile, the FTSE 250 index has declined 6.7%* year-to-date, following a 4.6% gain last year. These two indices provide investors with access to two fundamentally different segments of the U.K. market, each carrying its own risk exposure and economic sensitivities.

The FTSE 100 is the benchmark U.K. large-cap index. The index is highly international in nature, with about 80% of its revenues deriving from overseas activity, and is therefore exposed to global macroeconomic factors such as commodity price fluctuations, central bank policies in the U.K. and Europe, and currency markets. During periods of a weaker pound sterling for instance, FTSE 100 companies tend to benefit as foreign earnings translate into higher revenues when converted into GBP. Given the index’s global nature, FTSE 100 index derivatives can serve as effective tools to trade international macroeconomic trends within a U.K.-listed framework.

By contrast, the FTSE 250 index is more domestically focused, comprising mid-cap companies with a much greater reliance on the U.K. economy. In periods of fiscal expansion, FTSE 250 companies typically outperform as U.K. businesses benefit from easier financing conditions and stronger demand for goods and services.

The difference in sensitivity of these two indices provides investors with an ability to target specific exposure within the U.K. market.

Within ICE’s equity derivatives complex, the introduction of FTSE 100 Total Return Futures (TRFs) has provided investors with an innovative tool to gain exposure to the full equity return profile: price performance, dividends, and funding costs via repo rates. The inclusion of repo rates in the TRFs pricing structure makes them uniquely sensitive to interest rate expectations, adding another macroeconomic layer to U.K. equity positioning. This sensitivity has become increasingly relevant in 2025, especially in the context of a prospective lower rate environment that reduces funding costs and makes leveraged positions more attractive.

The ability to trade FTSE 100 TRFs and SONIA Futures on the same exchange provides investors with a cohesive framework to manage equity risk, optimize dividend reinvestment strategies and hedge interest rate exposure. This integration enhances market efficiency and reinforces the U.K.’s position as a sophisticated and dynamic trading environment in 2025.

U.K. fixed income markets: a different type of volatility

In contrast, U.K. fixed income has been volatile so far in 2025. The question is, what is different this time? Firstly, volatility in SONIA (near-term interest rates) and Long Gilts has remained well below the peak volatility of autumn 2022. This is despite plenty of wider macro risks relating to global trade and the potential for monetary policy easing. In response, ICE fixed income derivatives linked to the U.K. are seeing record usage growth.

Notably, Long Gilt Futures (10-year) have surpassed one million lots of open interest, reflecting a surge in investor activity. This increase indicates strong demand for risk management tools as institutions seek to navigate the U.K.'s evolving fiscal policies and interest rate outlook. This trend is also observable in the Gilt options market where volumes and open interest rose sharply through December and February. The ability to use options to hedge the risk of outsized moves in Gilts and Gilt futures has proved especially popular with some money managers.