Why the UK market is well-positioned to withstand the US tariff storm

Global markets including the UK were hit by extreme volatility following President Trump’s tariffs on April 2. For UK fund managers like myself, this feels somewhat comparable to Brexit. The stark difference between these tariff moves, and Brexit is their global impact, given the US’s substantial role in global GDP relative to the UK.  

The size and magnitude of the initial tariffs were larger than expected, leading to a sharp initial correction in the US and global markets, although warnings were well trailed in advance. More importantly, the broader implications are from a likely deceleration in US and global economic growth - not the direct tariff-related hits. Recession risks have clearly escalated, and the lingering uncertainty is what the market is currently pricing in. The US administration has since announced a 90-day pause on tariffs for most countries, sparking a brief relief rally. However, markets have remained volatile.   

The UK market’s international nature means it will feel some effects from these tariffs. It’s estimated that 26% of revenue in the UK market is tied to the US, while 17% is linked to emerging markets. The repercussions on US and global economic growth will also affect commodity demand, which forms 20%. European economies like Germany and Italy, which are export-driven markets, will also experience the consequences, affecting the 10% of the UK market linked to Europe. 

Weathering the storm 

It is also worth noting that 25% of the UK market (or 39% of the portfolio) that is domestically focused is relatively insulated. While the 10% tariff announcement is comparatively small, arguably it’s the composition of the UK that means it’s in a better position to weather these global changes. The UK is a service-oriented economy with a smaller export base. Also, the defensive nature of large sectors embedded within UK indices, such as consumer staples and utilities, could offer further strength against weakness in global growth and trade downturns. Whereas sectors like technology and manufacturing that rely on dispersed global manufacturing, are more vulnerable. 

One particularly resilient area is UK domestic consumption. Over the last six months, we have strategically added to retailers such as Frasers and DFS, housing-related stocks such as Genuit and a British builder merchant, and housebuilders such as Crest and Henry Boot to our portfolios.  

UK consumers have been saving heavily over the last two years, with consumption levels historically low due to concerns surrounding inflation, interest rates, and the Ukraine war. Although these issues persist, there have been encouraging signs recently with positive profit updates from retailers like Halfords and DFS.  

Another area where we continue to find opportunities is defensives, where we have added to the likes of Reckitt Benckiser, British American Tobacco and National Grid on weakness over recent quarters. Within the resources sector, we maintain an underweight position in large-cap miners reflecting our cautious view on iron ore. We also don’t hold the two large-cap UK oil companies.  

Smaller-cap equities are a particularly attractive hunting ground today, which trade at an aggregate price to earnings ratio of below 10x. The portfolio maintains a strategic bias toward small and mid-cap companies, comprising approximately 50-60% of the portfolio.  

Turning point for UK equities? 

The portfolio remains diversified with around 80-90 holdings. The financials sector is the largest absolute weight in the portfolio, though retains a high degree of diversification among holdings across a range of sub sectors, geographies and business models.  

Despite popular belief last year that the US would continue its dominance, the exact opposite has occurred so far this year, highlighting the benefits of a contrarian investment style. The UK has been at the forefront of performance over the past year. We believe that the UK’s low valuations, strong earnings growth and high dividends makes it an attractive environment for contrarian stock pickers. 

While we are undoubtedly entering a turbulent period in global politics and economic uncertainty, as tariffs likely impede global economic growth. The UK market is well-positioned to withstand this US-centric storm. The large divergence in performance between different international markets this year could signal a turning point for UK equities. 

We believe there are numerous attractive opportunities prevailing in the current market, available at low valuations, and we continue to uncover compelling investment ideas, particularly in periods of high market volatility.