Franklin Templeton: UK Equities: Trade, Baby Trade

CONTRIBUTORS | Ben Russon, Co-Head, UK Equities (Large Cap)

The United Kingdom was first to strike a trade deal with the United States under President Trump’s second term. However, the big positive for UK equities looks most likely to be the turmoil the tariffs have caused to US business. Early indications show the US is no longer the destination of choice for foreign investment, something dollar weakness reinforces. Could investors, instead, turn their heads towards the attractively valued UK equity market?

Key takeaways

• Tariffs have injected uncertainty to global economic outlooks and increased the probability of a large shift in international investment flow
• UK equities offer multiple sources of return, through dividends, earnings growth and share buybacks, but the big opportunity for investors is a re-rating of the market
• The United Kingdom is the first country to strike a trade deal with the United States which, when combined with improving international relations with Europe, makes the UK increasingly well positioned to attract investment

Trump’s tariffs need little introduction. World leaders, central bankers, economists, business owners and management have all been left scratching their heads. What will President Trump do next? What are the implications, both directly and indirectly, for companies? The questions go on and on. Many could speculate the answers to these but, given the seemingly erratic trade policy decisions, combined with an extremely interconnected world, it would be just that, speculation.

So much uncertainty can lead to a ‘wait and see’ approach for many long-term investors, preferring to wait until more clarity can help in strategic long-term decision making. However, inflection points often offer the most interesting opportunities. Right now, global investors should be looking carefully at their allocations.

The US makes up 66.5% of the FTSE World Index¹ and most active global managers also maintain a significant American exposure. Yet, the full effects of new trade and economic policies on the US are still a long way from becoming clear. This has wide-reaching implications for US economic growth and still does not yet appear to be fully baked into US equity prices, even after the recent pull back in valuations.

There is also the question over foreign investment in the US stock market. Are non-US investors as comfortable with significant US allocations, be it for economic, or geopolitical reasons? Early indications show that net foreign investment flows to the US are beginning to turn negative, suggesting that non-US capital may begin looking for a new home. And not to forget, there are many US institutional investors, with heavy domestic allocations, that are beginning to seriously revisit their non-US exposures. US dollar weakness is a clear indicator of sentiment changing towards US assets.

This brings them to the investment 101 basic argument against a passive approach – a market cap benchmark can lead you to be over exposed to certain areas of the index, which is good in a bull market period but when the tides turn, you will acutely feel this level of concentration. The US certainly continues to have major long term growth drivers, however there is increased cause for concern. Going back to fundamentals of portfolio exposure and investing in a diversified active portfolio can help reduce country level risk.

The announcement of the UK being the first country, since ‘Liberation Day’, to strike a trade deal with the US should make heads turn. The willingness of the US to work with the UK, combined with improving international relations with the European Union, is certainly encouraging. When people look seriously at the UK equity market, they’ll see it offers a tantalizing dividend yield, whilst still providing returns to investors via a combination of earnings growth and share buybacks. However, the big opportunity, is a re-rating of valuation multiples – even returning to long term averages could offer significant returns to investors.

Valuations really have been the thorn in the side of UK investors over recent years as a series of political shocks have done little to encourage investment in the UK. Through this period investors have quite rightly been asking what the catalyst for a re-rating will be, what will bring valuations back to long term norms? It’s likely to be a combination of factors, rather than one event, that will help change the UK’s fortunes. One thing that would certainly move the dial would be a reversal of investment flows with net flows to the UK turning positive. Decisions being made in the US could well be a catalyst for this.

Perhaps ‘Liberation Day’ will be most liberating for non-US investments.

Endnotes

1. Source: FTSE as at 30 April 2025.

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