Donald Trump’s “liberation day” tariffs may have sent global stock markets into free fall but since then all seems to have been forgiven by investors – especially those who ply their trade investing in British companies.
This month, America’s main stock market, the S&P 500, came within 2pc of surpassing its record highs set in February, accompanied by much fanfare on Wall Street after the period of sharp turbulence.
But while the US was celebrating playing catch-up after the president’s tariffs onslaught, UK stock markets have been quietly steaming ahead.
Steven Fine, the chief executive of City stockbroker Peel Hunt, says investors from outside the UK are starting to take note of London’s markets again after the Trump tariff turmoil.
He acknowledges that you might not notice the shift amid the “relentless” wave of companies leaving UK stock markets for the deeper pockets of US investors, including British semiconductor company Alphawave and payments group Wise.
“We have got a bit of a lack of self-esteem here,” says Fine. “Why do overseas markets think we’re more interesting than we do?”
Here are five closely watched charts to show why all is not lost for Britain’s stock market.
The main UK stock index, the FTSE 100, closed at a record high earlier this month and has climbed more than 8pc so far this year, vastly outperforming the S&P 500, which is up by less than 2pc over the same period.
Yet this year’s performance on the FTSE 100 is in stark contrast to previous years, where the City lagged European and US peers.
UK equity markets have “not been an easy hunting ground”, according to Tom Peberdy, of investment manager Ninety One. He says Brexit, the pandemic and an inflation crisis had made it “pretty tough” to be a UK-focused fund manager at the firm, which targets wealthy individuals and institutional investors.
“But it does feel like the tide is turning,” he says after years of watching outsized gains on Wall Street, primarily powered by the “magnificent seven” group of technology giants such as Apple and Amazon.
“Investors ultimately will gravitate towards where the opportunity is.”
The tide of money ebbing out of UK companies in recent years has depressed their share prices – but also made them cheaper to buy.
Ninety One is positioning itself for a surge in London markets, putting it at odds with the ever-increasing flow of money out of UK businesses over the past three years.
In comparison, companies on the S&P 500 have grown in value by about 32pc over that time, while the Nasdaq Composite, popular with technology investors, has gained 38pc.
2406 Investors have been taking money out of UK companies
The FTSE 100 has gained more than 16pc since April 2022. However, Fine, of Peel Hunt, sees this as a sign of resilience during a period when investors contended with the Liz Truss mini-Budget crisis and the surge in inflation triggered by the Ukraine war.
“We seem to deal with these things,” he says. “The resilience of the UK economy is something we don’t really recognise because it’s always about what’s going to happen next and how bad it’s going to be in the future.
“So can that buffer become a bit more of a springboard?”
Fund managers at Ninety One are convinced there are a series of arguments stacking up in favour of investing in British companies.
“We do think the UK gets mischaracterised still as energy and banks,” says fund manager Anna Farmbrough, who employs a strategy aimed at investing in “quality” companies.
“We think it is worth pointing out that capital goods is the largest sector in the UK. That is full of exceptional businesses operating in very niche industries. We really do have incredible innovation and technology being produced over here. They are often mission-critical products.”
2406 FTSE is undervalued compared with America and Europe
Those bids were at an 80pc premium to its share price at the time, which Farmbrough says “gives some reassurance around where the valuations for some of these businesses are, and that they are worth a lot more”.
Aside from offering the chance to buy stocks cheaply, the comparatively low valuations of companies on London’s markets also offers the opportunity for better returns.
“One thing that people don’t quite appreciate is what a big component dividends are in the forward returns of your buying a stock,” says Alessandro Dicorrado, who looks after value investing strategy at Ninety One.
“If you’re making an investment with a long-term return … most of that is dividend increases.”
Compared with the US S&P 500 and the Stoxx 600, the main stock market benchmark in Europe, the FTSE 100 is relatively cheap to buy.
2406 UK returns are better than the rest of the world
Dicorrado highlights the higher dividends and buyback yields offered by companies across the FTSE compared to the S&P 500 and the rest of the world.
One of the ironies of this is that if UK companies remain cheap, they will offer greater returns as it will be cheaper for them to buy back their own stock, increasing the dividend returns and value of the stocks owned by their current shareholders.
“The cheaper a company can buy back its own stock, the more durable income compounds over time,” says Dicorrado.
“Actually, what you want is for the stocks to stay cheap but we also don’t want the market to die. So let’s try to find a middle ground.”
Look under the bonnet and British companies are also humming along more efficiently than some of their global rivals, deploying their capital more effectively.
2406 Companies are deploying capital more effectively
For Farmbrough, the “real watershed moment” for London’s stock market came during the pandemic.
Faced with the huge challenges of lockdown, working from home and disrupted supply chains, companies were forced to “allocate capital much better”.
This is illustrated by the improvement in return on invested capital, known as Roic, of FTSE All Share companies over the last 10 years. The metric measures how effectively a company uses the money it has invested to generate profits.
Farmborough says: “There was a real watershed moment in the pandemic particularly amongst the more commoditised industries, where they really woke up to allocating capital in a more accretive way.
“So we think this has been a structural and quite permanent change to the UK market and it has not been reflected in valuations whatsoever.”
