London's premier FTSE 100 index has defied its critics and the domestic economic gloom to post its most impressive annual performance in over a decade and a half. The so-called 'Footsie' surged by 21.5% over the course of 2025, marking its best 12-month run since the aftermath of the 2008 financial crisis in 2009.
The Engine Behind the Rally: Sectoral Tailwinds
This remarkable uptick was not a reflection of a booming UK economy, but rather the result of powerful tailwinds blowing through its major constituent companies. A key driver was the defence sector, buoyed by renewed spending commitments from NATO's European members. This propelled giants like Rolls-Royce, whose share price has made a stunning journey from below 100p in 2022 to over £11.
Similarly, the global mining contingent within the index rode a wave of demand for precious metals and copper, essential for the energy transition. Fresnillo, the Mexico-based silver miner, emerged as the index's top performer, seeing its value increase almost fivefold. The banking sector also thrived in an environment of low defaults and falling interest rates, largely weathering the car finance scandal.
In pharmaceuticals, fears over US trade policy under Donald Trump proved overblown, allowing AstraZeneca – the Footsie's most valuable company – to climb nearly 30%. UK energy infrastructure giants National Grid and SSE benefited from regulatory backing for grid upgrades. The notable laggard was Diageo, hampered by a weak global spirits market.
A Strategic Shift: The Buyback Revolution
Beyond sector-specific gains, a fundamental shift in corporate strategy has been pivotal. Sue Noffke, head of UK equities at Schroders, highlights a move away from London's traditional identity as the 'dividend yield capital of the world' towards becoming the 'share buyback capital of the world'.
With the market historically cheap – trading at under 10 times earnings as recently as spring 2024 – buybacks offered more value. Noffke calculates that 55% of larger UK companies bought back at least 1% of their shares in the past year, a higher rate than in the US. Shell, for instance, has repurchased over 20% of its equity since 2020.
This trend is part of a broader wave of corporate self-improvement and sharper capital allocation. Examples include Unilever spinning off its ice-cream division, Smiths Group breaking up, BP pivoting from low-return renewables, and the landmark $50bn merger between Anglo American and Canada's Teck Resources.
An Image Overhaul for the London Market?
The sustained performance challenges the 'Jurassic Park' narrative often attached to the London market. While it still lacks the flashy tech and AI stocks dominant in the US, its appeal lies elsewhere. The UK market is cheap, cash-rich, and increasingly shareholder-friendly, with a diverse sector mix not reliant on a single thematic trend.
As Noffke argues, the combination of management ambition and investor pressure is fostering more grip and better returns. The Footsie's three-year cumulative return, including dividends, stands at a robust 48%.
Risks remain, including concentration in a few key sectors and the long-standing dearth of new tech listings. However, the 2025 rally demonstrates that the London dinosaur is far from extinct, instead evolving and delivering strong returns for investors who value fundamentals over fashion.
