Global equity markets have seen some extreme moves recently as they try to make sense of the Trump administration’s unpredictable tariff policy.
It is too early to say with any certainty what the full implications of these policies will be, but it is clear that we are in an environment of elevated economic risk and increased uncertainty, which should logically result in increased equity risk premia, and potentially lower earnings.
However, while the UK market has not been immune to the recent global turmoil, it has deservedly proved relatively resilient, outperforming global equities in dollar terms since ‘Liberation Day’, continuing the trend of outperformance so far in 2025.
Indeed, we believe that UK equities offer a compelling medium to long-term investment opportunity at the current time, offering relative defensiveness at deeply discounted valuations, for reasons we elaborate on below.
The UK looks well-placed from a geopolitical standpoint, both on the global stage and domestically.
While the situation remains fluid and can quickly change, the UK has thus far emerged as a relative winner from Donald Trump’s tariff policies.
The initial tariff rate proposed was lower than average, and the UK’s exposure to exports of goods to the US is relatively modest.
With the US now seemingly open to negotiations with many countries, domestically the UK offers relative political stability, with the new Labour government still being in its first year.
From an economic perspective, while there are reasons to be cautious about global growth, and specifically the outlook for the US, the UK and the US are at very different stages in the economic cycle.
The US economy has been relatively strong in recent periods, but now appears to be softening, with this evident even before any impact of the recent tariff-related uncertainty.
By contrast, the UK economy has been subdued for some time, with many areas of activity operating at very depressed levels, for example certain housing and construction related sectors.
And indeed, there are reasons to believe that these more cyclical areas of the UK economy are poised to pick up from depressed levels, helped by falling interest rates, with the market pricing in more significant rate cuts following the recent turbulence.
Perhaps most importantly, the UK market continues to offer compelling valuations.
While the US had been increasingly priced for perfection, UK equities have underperformed their global counterparts for a number of years, until recently, driven by persistent outflows most notably since the Brexit referendum in 2016.
This underperformance has created a valuation dislocation versus other major markets that is as extreme as it has been for a long time.
Looking at the market on a sector-neutral basis, which adjusts for differences in sector exposures, the UK market has derated from a small price-to-earnings premium to global equities in 2016 to around 20 per cent discount now, which is close to the largest discount in 30 years, as shown in the chart below.
UK sector-adjusted price-to-earnings ratio relative to World
This valuation discrepancy is also evident when looking at market-implied discount rates.
As shown in the second chart below, the implied cost of capital in the UK has diverged significantly from other major markets in recent years, leaving it as a clear outlier, implying material undervaluation.
Market-implied real cost of capital
This valuation dislocation is even more extreme as we go down the market-cap spectrum, with UK mid and small-caps trading at historically wide discounts to the broader UK market — itself already cheap versus global equities as discussed.
Another valuation metric supportive of the relative appeal of the UK is the Shiller PE multiple, which is a cyclically-adjusted PE multiple that is based on smoothed, normalised earnings.
As such it looks at valuations normalised for economic and business cycles, and hence captures the fact referenced earlier that the US and the UK are at different stages in the economic cycle.
The Shiller PE for the US market still looks very elevated versus its long-run average even after the recent correction.
In contrast, however, the Shiller PE for the UK is significantly lower than that in the US and broadly in line with long-run averages.
It is also worth referencing flows, where there are signs that the sands are shifting.
Even before the so-called liberation Day, investors had begun to move capital out of the US into relative laggard markets, including Europe.
This trend has since accelerated as the policies of the Trump administration sow seeds of doubt in the minds of investors about the relative appeal of US equities, and dollar assets more broadly.
Europe-focused equity funds have seen significant inflows so far in 2025, and while it is true to say that the UK has not enjoyed a similar inflection of flows as yet, we do believe this dynamic should be supportive.
Where do we see the best opportunities within the UK?
Our portfolio is skewed towards investments characterised by a high degree of earnings visibility, strong balance sheets and compelling valuations.
This includes highly defensive companies with very little cyclicality, many of which are on very depressed or trough valuations.
But we also have exposure to companies that operate in more cyclical end markets, but where the outlook is strong or in many cases where those markets are already at a low ebb, and where the outlook is improving, in some cases underpinned by government policy.
We are cognisant that we are in an environment of increased economic uncertainty globally and elevated equity risk premia, and we recognise that the UK is not immune from these global risk factors.
However, as a relatively defensive market with very strong valuation support and with a domestic economy that has the potential to improve from depressed levels, UK equities are very well positioned for the current environment and offer a compelling medium to long-term investment opportunity.
Andrew Raikes is a portfolio manager at TT UK Equity Strategy
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