UK equities look unattractive next to peers in the US following Donald Trump’s re-election, but might offer better opportunities than stocks in Europe.
In the wake of Trump’s victory, investors broadly agreed that the US stock market will continue to outshine peers for the foreseeable future.
“The outcome of the election appears to have further strengthened the idea that US exceptionalism will continue, for both the economy and markets,” analysts at Barclays wrote.
US stock markets hit record highs following Trump’s victory, as investors poured funds into the world’s largest economy. US equity funds received more than $80bn in the week after the vote.
Turning to the UK, the analysts worried that last month’s Budget had done little to lift investor sentiment.
The gloominess has returned, with the general perception that the Budget is unlikely to do much for growth despite higher investment, but may well keep inflation slightly more elevated than otherwise
Business surveys since the Budget suggest that growth has slowed significantly, while inflation has also come in slightly higher than expected, which will likely slow the pace of rate cuts. This has caused “further doubts about the UK investment case,” the analysts said.
Not all bad news
Hubert de Barochez, senior markets economist at Capital Economics, agreed that US markets would continue to outperform rivals following Trump’s victory.
He argued that the economy would continue to grow, despite the potential impact of tariffs, while investors would likely retain their enthusiasm for AI.
“The upshot is that we continue to expect AI-hype to pull the US stock market higher…Elsewhere, however, the prospects for equities have worsened,” de Barochez said.
“The main reason is that we expect Trump’s administration to impose universal tariffs on imported goods, and that this will take a toll on non-US equities…Most stock markets would probably fare poorly in the event of a trade war.”
Although UK equities will almost certainly lag the US, de Barochez suggested they “might do quite well, at least relative to those in the rest of Europe”.
Insulated Britain
Many economists have noted that the UK is less exposed to the threat of Trump’s tariffs than European economies, which are more heavily reliant on manufacturing.
“The UK is relatively more insulated than the rest of Europe from tariffs given a greater focus on services/financials,” analysts at Goldman Sachs said.
Since Trump’s election, the FTSE 100 has climbed 0.89 per cent while the Stoxx Europe 600 has fallen 0.59 per cent.
The Goldman analysts also noted that the FTSE 100 could outperform if there was a tech pullback in the US. “UK large caps tend to perform relatively well during tech pullbacks given the lack of exposure and the value-defensive make-up of FTSE 100,” they wrote.
Analysts at JP Morgan were also more favourable towards the UK compared to European markets.
“In a European context, we believe UK equities offer better risk-reward compared to Eurozone, even though UK real GDP growth projections appear unexciting,” they said.