Seeking a tariff haven?

The UK stock market might be just that.

As European equities are roiled by President-elect Donald Trump’s trade threats, there’s one corner of the market that looks relatively insulated — Britain.

That hasn’t gone unnoticed, with several strategists advising clients to load up on UK shares. Since the Nov. 5 US election, London has fared better than mainland European bourses, which are seen as more exposed to Trump’s pledges to hike tariffs on trade partners. As a result, the Euro Stoxx 50 share index has fallen 4.5% this quarter, while Britain’s FTSE 100 and FTSE 250 gauges are down 1.5%.

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The FTSE is “a very good place to hide,” said Michael Browne, chief investment officer at Martin Currie Investment Management, noting that Britain ranks among the countries least exposed to potential US tariffs. While that’s largely because the UK manufactures and exports less than the euro area, “right now that’s really good news,” he added.

Browne sees other pluses too. Share valuations are cheap, while dividend and free cash flow yields are high and UK interest rates are likely to fall further. “The FTSE looks like an incredibly cheap, high-yielding, quality place to go for the next six to 12 months,” he said in an interview. “That’s what we’re doing at the moment.”

About 34% of the FTSE 100 is comprised of so-called defensive sectors, such as consumer staples and health care, which are less prone to economic fluctuations. So the current troubled backdrop, with trade tensions, slowing growth and geopolitical flare-ups, offers it a chance to shine. The index also derives about 28% of its revenues from the US, allowing it to benefit from dollar strength.

All that has spurred strategists from Societe Generale SA and UBS Group AG to move UK equities to an overweight stance. They join peers at Goldman Sachs Group Inc. and JPMorgan Chase & Co., who already have bullish calls on Britain. “We can see that the UK outperforms when defensives outperform,” wrote UBS’s Andrew Garthwaite, who has an overweight allocation to defensive stocks.

Not only does the UK have less “Trump risk” on UBS’s scorecard than any major non-US market, its price-earnings ratio displays an extreme 25% discount to global peers on a sector-adjusted basis. Domestic-focused retailers, homebuilders and banks are the favored sectors for Garthwaite, who names Relx Plc, Experian Plc, Smith & Nephew Plc and Reckitt Benckiser Group Plc as among the likely beneficiaries.

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Goldman Sachs strategist Sharon Bell agrees with that view. “The UK is relatively more insulated than the rest of Europe from tariffs given a greater focus on services/financials,” she said.

To be sure, UK stocks have endured a series of false starts in the past decade. One risk at present is that tax hikes outlined in the recent budget could fan inflation fears, lifting bond yields, while Wednesday data confirmed that price growth accelerated in October. Only one full UK rate cut is priced until next March, compared to three that traders expect in the euro area.

That hasn’t yet deterred the bulls. “Low positioning, low valuation, even adjusted for growth, and a modestly better economic outlook in the UK than in the euro area,” are among the reasons Goldman’s Bell is sticking with her Buy British thesis.

© 2024 Bloomberg

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