UnBrexit – the next driver for British stocks?

Undervalued-Shares.com has repeatedly highlighted how cheap UK equities have become, and how this has turned many British companies into attractive takeover targets.

In fact, 2025 saw a 74% increase in takeovers of UK-listed companies by overseas bidders.

M&A activity has been one of the reasons why the British stock market performed well in 2025, despite generally sluggish earnings growth.

Recent bid premia for UK companies have averaged 48%, compared to 20% historically.

And even after this wave of activity, countless British stocks remain severely undervalued.

Could renewed discussion around rejoining the European Union (EU) provide additional fuel for a UK market rally in 2026 and 2027?

Why UnBrexit may be on the cards

After the 2016 referendum, many observers pointed to the large number of older people who supported Brexit.

"Leave voters will die off by the millions over the next few years", they said.

And die off they did.

Since 2016, around 6m British voters have died. Around 5m of them will have voted, and 3.2m voted Leave.

Political statistics should always be taken with a grain of salt, as they are often framed to support a particular narrative. Still, this broadly aligns with common-sense observations: as older people pass away, the balance of opinion shifts in favour of Europhiles.

Now that nearly a decade has passed since the referendum, these demographic changes are starting to show up in the data. The chart below by YouGov illustrates this clearly.

Out of curiosity, I posted the following question in a WhatsApp group of London finance contacts:

"2029 General Election as Brexit Referendum #2?"

The reactions were mixed, but the general tone was sceptical. Most did not think UnBrexit was a realistic or imminent theme.

That scepticism made me even more interested in exploring the question.

I strongly believe that to meaningfully outperform the market, you need to be right about something that others do not yet believe in.

I wrote about the value of non-consensus views back in 2019.

Could UnBrexit happen, and what would it mean for markets?

If you follow UK politics, there are now several signs that Britain's relationship with the EU may return to wider debate sooner than many expect.

Earlier this month, Prime Minister Sir Keir Starmer refused to rule out the UK rejoining the EU in his lifetime. In a 7 December 2025 interview with The Observer, he said he was in discussions with European partners "about how we can be closer". When pressed repeatedly on whether he still believed the UK would not rejoin during his lifetime, he declined to answer.

Shortly before that, Deputy Prime Minister David Lammy also refused several times to rule out rejoining. While stating that rejoining the customs union was not "currently" government policy, he added that it was "self-evident" that other countries had "seen growth" after doing so.

The debate moved another step when Health Secretary Wes Streeting said on 21 December 2025 that the UK "must go further" in undoing Brexit . Notably, Streeting currently leads the betting odds on several sites to become the next Prime Minister.

So far, much of the discussion still centres on the customs union rather than full EU membership. However, this may simply be politicians testing the waters. On 21 December 2025, the centre-right The Times published a poll showing that eight out of ten Labour voters who backed the party at the last election support the idea of rejoining the customs union. The proposal also received backing from 78% of Liberal Democrat voters and even 39% (!) of those who voted Tory at the last election.

Which raises the question: could the UK's next General Election become a de facto Referendum #2?

Labour needs a clear profile

The 2016 referendum was supposed to be a once-in-a-lifetime vote. Reopening the debate would inevitably anger many Leave voters, who were told the result would be binding.

Personally, I doubt this will stand in the way.

Politicians tend to focus on what maximises their power and access to resources. Career politicians, bureaucrats, think tanks, and NGOs, all have strong incentives (financial and otherwise) to push for rejoining the EU. The EU itself also has a long history of encouraging repeat votes when the "wrong" outcome occurs.

More importantly, Labour is currently trailing badly in the polls.

Sir Keir's government struggles to define what it stands for. A clear cause could help reset the narrative.

The Tories cannot credibly campaign on rejoining, having delivered Brexit. Reform UK cannot either, being led by Mr. Brexit himself. Labour, by contrast, could position itself as the rejoin party. That might put off some traditional voters but attract a much larger group of new ones. Higher turnout could play a decisive role – especially if voters are offered tangible benefits such as free movement or Schengen access.

That said, there are valid counterarguments. Starmer may not survive as Labour leader beyond the May 2026 local elections, and some (such as Annabel Denham in her recent op-ed "Reversing Brexit won't save Starmer's skin") argue that UnBrexit would not be a vote winner at all.

Timing is another issue. Labour would likely wait until 2027 to make such a pledge, ahead of the 2029 election.

Still, it's an interesting theme to follow from a market perspective.

A new narrative for the UK market?

Markets today are increasingly driven by narratives.

Anyone on the remain side of the Brexit debate will take some satisfaction from the chart below. It shows how, since the 2016 referendum, the British stock market has become progressively cheaper when measured by price/earnings ratio. Relative to global peers, UK equities have rarely looked cheaper.

What an undervalued market needs is a catalyst. After all, a cheap stock – or a cheap market – can remain cheap for a long time, or even forever. Only when a spark appears does a re-rating begin.

For the UK market, M&A activity has been one such spark.

Additional momentum could come from a renewed push to rejoin the EU:

• It would make for a powerful narrative, and the mainstream media would hype it relentlessly.
• It would be a genuinely new theme. For once, something that is not yet priced in.
• Millions of investors in Britain and abroad could latch onto it as a conviction play, as it aligns with long-held political beliefs. Who knows, UK pension funds (which are also political institutions to some extent) might even use it as an argument to increase their allocation to domestic equities from today's record-low 0.7%.

Concrete ideas to consider if or when we get to that point include:

• Potential M&A targets that could be of particular interest to buyers from EU countries such as Germany or France.
• If rejoining the EU were economically advantageous for the UK (whether in reality or perception), then the FTSE 250, as a proxy for the domestic economy, should benefit. This could be played via an ETF.
• Following the same logic, rejoining the EU should provide a tailwind for sterling.

While waiting for such a scenario to materialise, the UK market is likely to perform well regardless.

Ignore the UK market at your peril

I believe the deep pessimism toward the UK will begin to ease in 2026. Being bearish on the UK has not only been consensus, but almost an obsession. Media headlines have even raised the prospect of an International Monetary Fund bailout. The reality, however, looks very different.

The average maturity of UK government debt is just under 14 years, the longest of any G7 nation. The country's debt-to-GDP ratio stands at just 89%, compared with 120% for the US and 135% for Italy. The most recent gilt auction was 2.4x oversubscribed. The UK is not heading toward a bailout, but toward rate cuts.

There is now greater clarity around fiscal policy, inflationary pressures are easing, and growth remains close to zero. Interest rates could gradually come down by 100-250 basis points. The Bank of England is now lagging its peers, and cutting rates is the least controversial form of stimulus available.

Lower rates would allow consumers to refinance mortgages at cheaper levels, something that can add substantial spending power in the UK.

The past year has already shown that politics do not necessarily dictate stock market performance. Despite a weak macro backdrop and corporate earnings having fallen by 15% over the past two years, UK equities have performed strongly.

My bet is that this continues. In 2026 and 2027, UK corporate earnings are forecast to recover by 5% and 15%, respectively.

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