The UK government should start a sovereign wealth fund to invest in UK equities as a flag waving exercise to stimulate confidence in the stock market, according to Hugh Sergeant, head of value and recovery at River Global Investors, who thinks this radical change could help provide a floor for small and mid-caps where the absence of buyers in the past six months has led to some stocks trading at a 50% discount to their intrinsic value.
HM Treasury could use its stake in NatWest to establish the sovereign wealth fund, which would be owned by UK taxpayers, he suggested.
The government has been selling down its stake in NatWest with the intention of returning it to private ownership and as of December last year, it owned 9.99% of the bank’s shares. NatWest had a £36.4bn market capitalisation as at 1 April 2025 so it is conceivable that HM Treasury could channel as much as £2-3bn into a sovereign wealth fund.
This wouldn’t be enough money to move the market in and of itself. Instead, creating a fund would be “a flag waving exercise” and a way for the government to “act as a cheerleader for equities”, Sergeant explained.
“I think we need a bit of flag waving for public equities. There is an issue in the UK about a broad lack of appetite for equity risk amongst institutions and private investors. Public equities are important for the UK economy and they're not being given enough airtime.”
The Labour government has already launched a £27.8bn National Wealth Fund to mobilise private investment and deliver the government’s growth and clean energy agenda – so it does have form in carving out a large pool of capital to further its policy goals.
Sergeant’s idea is different because his new sovereign fund would invest in listed stocks. He suggested investing in any company that pays more than 50% of its tax in the UK.
Most sovereign wealth funds invest in an international multi-asset portfolio to protect and grow their nation’s wealth, so Sergeant’s proposal differs from how a typical sovereign wealth fund functions.
Nonetheless, he believes it would make money for taxpayers. The FTSE All Share index rose 76.6% over five years to 31 March 2025, so an investment of £3bn made five years ago would be worth £5.3bn (before fees, costs and this month's sell-off).
“I think we need to remind people that equity investing is a good thing. You can compound your returns at 10% per annum plus. And UK equities should be well positioned from here because they're available very cheaply,” he argued.
“The correction catalysed by Donald Trump’s war on US trade deficits has made UK equities even cheaper (price-to-earnings ratios in the bottom decile of historic ranges); small- and mid-caps particularly, the latter now trading on earnings multiples below 10x.”
Even before ‘Liberation Day’ on 2 April, some small- and mid-caps were trading at “absolutely crazy, irrational” valuations.
“At the moment, public equity markets in the UK can't correctly price small and mid-caps companies. What we have is clearly a buyer’s strike in small and mid-caps and that's creating an amazing opportunity set,” he said.
“Price discovery is absent in the small and mid-cap world at the moment because there aren't buyers. Fundamentals for small and mid-cap companies are fine but the only buyers at the moment are the companies themselves who are buying back their shares.”
This phenomenon has been going on for about six months, partly due to disappointment with the UK’s economic outlook, he said.
One of Sergeant’s favourite stocks is Shaftesbury Capital, a real estate investment trust that owns a £5bn portfolio of prime properties in London’s West End, including Covent Garden and Carnaby Street. It is trading at a 35-40% discount to net asset value, which Sergeant described as “completely ridiculous”.
He also holds Great Portland Estates, which invests in commercial property in central London and trades at a half its net asset value.
“The typical stock we have is probably trading at less than 10x normalised earnings and a lot of the recovery stocks are trading at less than 5x recovered earnings,” he added.
The considerable uncertainty associated with Trump’s trade wars has hurt global equity markets this month and is likely to negatively impact UK economic growth, yet Sergeant believes there is a silver lining.
“The UK is relatively well placed in this battle as we do not have a trade surplus with the US and are as a result not a target,” he explained.
“For the UK, inflationary pressures will now abate due to lower prices on gas and imports, this allowing interest rates to be cut, supporting the domestic economy.”
He also hopes the UK’s status as a relative safe haven will reverse the tide of outflows. “We would expect money to start coming home, as UK-based investing institutions realise that they now have too big an exposure to the US market and the dollar, and that the UK's relative economic performance will start to improve. Small and mid-caps should be particular beneficiaries,” he said.