Managers pick their favourite sectors and stocks as UK market outperforms during tariff turmoil
The UK equity market is seen as a “beacon of stability”. Housebuilders, property and companies with a domestic focus are tipped to perform well.
The UK market has shown resilience in the face of the global market turbulence in the first few months of 2025. Since the start of the year, the average UK All Companies investment trust is up by just over 10% as of 8 May, compared to the average trust in the Global sector which is up by less than 1%.
Annabel Brodie-Smith, Communications Director of the Association of Investment Companies (AIC), said: “It may be that the UK market has already started its rebound after several years of underperformance. We certainly aren’t out of the woods, but with two trade deals signed and interest rates on their way down, the stars may finally be aligning for UK companies.”
We asked some of the UK’s leading investment trust managers why the UK is such a good place to invest in the current climate, and what it might take for valuations to catch up with international peers.
David Smith, Portfolio Manager of Henderson High Income Trust, said: “There are a number of reasons to invest in the UK now. Firstly, the starting valuation of the UK equity market is low and trading at a discount to its long-term average and other global indices, especially the US, helping to absorb negative sentiment around trade tensions.
“Secondly, large cap companies in the UK are dominated by defensive businesses, such as consumer staples, where earnings are typically more resilient in an economic slowdown and where manufacturing is generally done locally.
“Finally, the UK economy is not a large exporter of products to the US so the direct impact on economic growth from tariffs is likely to be limited, which is important for more domestic businesses especially as the UK economy is showing signs of recovery.”
There are a number of reasons to invest in the UK now. Firstly, the starting valuation of the UK equity market is low and trading at a discount to its long-term average and other global indices, especially the US, helping to absorb negative sentiment around trade tensions.
David Smith, Portfolio Manager of Henderson High Income Trust
Simon Gergel, Manager of Merchants Trust, said: “The UK has a broadly balanced trading position with the USA, which means it is less of a focus for the US administration in their tariff policy. Furthermore, political risk is low in the UK with Labour having a strong majority in parliament, which stands in contrast to much of the Western world.”
Alex Wright, Manager of Fidelity Special Values, said: “The UK market is well positioned to withstand this US-centric storm. Direct tariff exposure is minimal given the UK’s small export base and service-oriented economy. Moreover, the UK’s sector composition is skewed towards defensive areas such as consumer staples and utilities.
“This is strikingly different to other regions with high export dependencies to the US and significant sector weightings in affected areas, such as technology, aerospace and manufacturing which are heavily reliant on globalised supply chains.
“The UK market’s international nature means that it will feel some effects from the tariffs, but mostly from the broader implications of a likely deceleration in US and global economic growth, rather than direct tariff-related hits.”
Charles Luke, Fund Manager of Murray Income Trust, said: “Fortunately, UK exporters find themselves benefiting from a lower tariff level than many of their international competitors. The tariff shock is happening at a time when the outlook for UK-listed companies is improving, energy and food prices are falling, pressures on the UK consumer are easing, while the labour market remains healthy and savings are elevated.
“The Bank of England has significant scope to reduce interest rates. UK equities are valued attractively, especially compared to US equities, and UK equities have been consistently overlooked by international investors. It may be that, having monopolised investment returns for years, the attractions of the US equity market are beginning to wane.”
Catalysts for a UK stock market recovery
David Smith, Portfolio Manager of Henderson High Income Trust, said: “It’s no secret that the UK equity market has significantly underperformed the global index over the last ten years or so. However, looking at long-term analysis, UK underperformance hasn’t always been the case. The UK outperformed the global index in the 70s, 80s, 90s, and noughties. During these decades, interest rates were higher versus the near zero rates we have experienced since the global financial crisis. Interestingly, since interest rates started to rise at the end of 2021 the FTSE 100 has outperformed the MSCI World ex UK Index. This would suggest that the catalyst may have already happened and a more normalised level of interest rates has led to better returns from the UK market.”
Simon Gergel, Manager of Merchants Trust, said: “It is difficult to spot catalysts in advance but a cheap market with a stable political environment is very helpful when many investors seem to be reassessing their exposure to the USA. There are already two big groups of investors buying UK equities: the companies themselves buying back stock, and takeover bids coming in from private equity and corporate buyers. Because of these buyers, any slowdown in selling of shares by retail investors could lead to a revaluation of the UK market, even without inflows to the market. Inflows should accelerate this process.”
Charles Luke, Fund Manager of Murray Income Trust, said: “In a world framed by uncertainty, we believe investors will increasingly see the UK as a relative beacon of stability. An improving economic backdrop coupled with lower interest rates, increasing M&A activity, attractive valuations illustrated by continued corporate share buybacks and healthy profit growth should prompt both domestic and international investors to look again at the UK market.”
Alex Wright, Manager of Fidelity Special Values, said: “The UK market did indeed fall sharply post-Brexit compared to other markets around the world for roughly five years between 2016 and late 2020. But since then the UK has actually been performing roughly in line with international peers, but few people seem to have noticed. This has made the UK an attractive hunting ground for contrarian value investors, and a fertile environment for the Fidelity Special Values trust. Over the last five years, the trust has done well versus the UK market, but also – perhaps more surprisingly – it has beaten the US technology heavy Nasdaq. This is not a result of any meaningful rerating in the UK stock market. Instead, it has been a product of strong earnings growth from UK companies in the portfolio.”
What opportunities are you seeing in the UK?
Charles Luke, Fund Manager of Murray Income Trust, said: “UK mid caps have been overlooked for some time now. I would highlight two companies in particular. Firstly Dunelm, which is the market leader in home furnishings in the UK. We believe the company can continue to take share in a fragmented market. Dunelm has a multi-channel offering with around 40% of sales now through its website.
“Dunelm has a strong selection of own label products across different price ranges and works closely with its suppliers under long-term partnerships. The company has recently expanded into Ireland and has the potential for further geographic expansion over the long term. The shares trade on a mid-teens price-earnings ratio with a dividend yield of around 4%, and this has typically been supplemented by an additional annual special dividend given the strength of the balance sheet.
“Secondly, I would highlight Gamma Communications, which has just moved from the Alternative Investment Market (AIM) to the Main Market and will now become more familiar to a new set of potential investors. Gamma is a telecoms company providing a range of mostly cloud-based communications solutions that serve predominantly SMEs in the UK and also Germany following a series of acquisitions. The increasing complexity of communications is a growth driver for the company which benefits from recurring revenues, strong margins, high cash conversion and a product that is critical to the businesses that use their services. We think a mid to low-teens P/E multiple belies the growth potential for the business.”
Alex Wright, Manager of Fidelity Special Values, said: “We have been finding new investment opportunities in domestically orientated cyclical areas, such as industrials, advertising and staffing, while also selectively adding back exposure to real estate stocks and housing related names, where demand appears to be stabilising and valuations remain attractive.
“We recently increased exposure to retailers specialising in big-ticket items such as kitchens and sofas, where sales are 10% to 25% below historical volumes. We anticipate an improving outlook as housing market volumes strengthen and interest rates decline, coinciding with a reduction in industry competition.
“Smaller cap equities are a particularly attractive hunting ground today, as they trade at an aggregate price to earnings ratio of below 10x. We maintain a strategic bias toward small and mid cap companies, comprising approximately 50% to 60% of the portfolio.”
David Smith, Portfolio Manager of Henderson High Income Trust, said: “I think there is a real opportunity in more domestic businesses. The consumer at the aggregate level is in good financial health with low levels of borrowings and high savings. The falling oil price, dollar weakness and lower interest rates should reduce costs for consumers while wages are still growing, which hopefully improves confidence.
“Also, valuations in this area of the market are particularly attractive and we have exposure through companies such as Premier Inn owner Whitbread, housebuilder Taylor Wimpey and real estate company British Land.”
Simon Gergel, Manager of Merchants Trust, said: “We generally see best value in the medium and smaller companies, and in many consumer facing and real estate sectors. Companies associated with the housing market, either building homes themselves, or supplying materials, look well placed to benefit from recovering house building volumes and lower interest rates. Real estate companies should benefit from recovering asset valuations over time, and many are trading at historically low levels compared to those asset values.”
