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Andy Raikes

Market Outlook

UK Outlook

Outlook
14 April 2025

By

Co-Portfolio Manager, TT Environmental Solutions Strategy; Portfolio Manager, TT UK Equity Strategy

Latest UK economic and market outlook. 

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Equity markets have seen some very extreme moves as they try to make sense of the Trump administration's erratic tariff policy and its potential implications. The initial tariff proposals represented a major exogenous shock to the global economy and markets, being orders of magnitude larger than those announced in Trump’s first term. This remains the case with the subsequent proposal to further increase tariffs on China, whilst pausing implementation of the full extent of the initial proposals on the rest of the world. Clearly the situation remains fluid and can change very quickly. As such, at this stage it is difficult to accurately quantify the impact, partly because we do not know what the end point of tariffs will be, and partly because of the lack of any modern historical precedent for such an unorthodox policy shift. This uncertainty is exacerbating market volatility and increasing equity risk premia.

Key factors to monitor will be negotiation efforts with various countries, further retaliatory measures from China, as well as any monetary and fiscal easing. Beijing has already announced countermeasures, and is likely willing to take some pain rather than be seen to capitulate to Trump. As it demonstrated through its protracted Covid policies, China has a high threshold for such pain. It also has the ability to stimulate its economy to partially offset the impact of tariffs. With regard to monetary policy, markets began to price in a decidedly dovish response from the Fed, although this is far from certain given that tariffs are likely to increase inflation. On fiscal policy, Trump’s administration has talked of passing tax cuts this year to offset some of the tariff headwinds. There may also be further offsets to global consumers to the extent that slower growth results in a falling oil price and lower interest rates.

While the tariff situation has certainly added to economic uncertainty globally, we continue to view the UK market as relatively defensive and significantly undervalued. While the US economy has been strong for some time, the UK economy is at a very different starting point, having been very subdued with many areas of activity already at extremely depressed levels and in some cases showing signs of improvement. Moreover, the UK market continues to trade at a very depressed valuation, in contrast to the S&P which still trades on elevated multiples even after recent declines. This valuation difference is even more stark when we look at the cyclically adjusted PE multiple (CAPE), where the US continues to look very elevated versus the UK.

We continue to run a relatively balanced portfolio, with the beta having edged down in recent months, currently sitting just below 1.0 at the time of writing. This is partly as we have been reducing our mid-cap exposure since last October’s Budget, after which we became more cautious on domestic cyclicals, given higher national insurance costs, potentially higher inflation, and disruption as companies adjust the size of their workforce to the higher-cost new reality. With this in mind, we sold or reduced Deliveroo, Jet2, Grafton and Watches of Switzerland during Q1, having already taken action in Q4 of last year.

The largest overweights in the portfolio are skewed to either highly defensive companies with very little cyclicality, many of which are on very depressed/trough valuations (e.g. DCC, Serco, Telecom Plus) or to companies that do operate in more cyclical end markets, but where those end markets are already at cyclical lows and where the outlook is strong or improving, in some cases underpinned by government infrastructure spending & policy. Again we see these businesses trading at very attractive valuation multiples. Examples include Kingspan, Breedon, Balfour Beatty and Glenveagh.

Furthermore, we have been taking advantage of the opportunities that are being presented by the recent market volatility, deploying some of the cash we had on the sidelines into a number of our preferred names. Given the ongoing macro uncertainty, these additions have been focussed on more defensive names, with strong balance sheets and with valuations that we believe have become even more attractive in this indiscriminate sell off.

Important Information:

Nothing in this document constitutes or should be treated as investment advice or an offer to buy or sell any security or other investment. TT is authorised and regulated in the United Kingdom by the Financial Conduct Authority (FCA).

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