US exceptionalism and outlook for UK and global equities

For China, it is set to be much higher at 60 per cent.

What does this mean for the UK and equities, more globally?

With more than a fifth of UK exports going to the US, and given the large proportion of overseas earnings in the UK equity market, the UK is highly exposed to an increase in trade frictions, says Chris Arcari, head of capital markets at Hymans Robertson.

However, potential sterling weakness, which increases overseas earnings in local currency terms, might provide some relief to the UK equity market. 

The UK market is cheap, but earnings growth is structurally lower than in the US, so we wouldn’t expect the valuation gap to fully close 

Chris Arcari, Hymans Robertson

This is why, according to Arcari, diversification remains key.

He says: “The UK market is cheap, but earnings growth is structurally lower than in the US, so we wouldn’t expect the valuation gap to fully close. 

“There will be some relative winners from trade substitution as well as losers from the Trump trade wars. We wouldn’t avoid emerging markets, but we might prefer either active approaches or those that manage exposure to the most exposed regions and countries, such as China.”

The UK stock market has been under something of a cloud since the Brexit vote back in 2016. 

This, combined with an inherent bias to out-of-favour sectors, has led the UK stock market to trade at extremely low valuations versus its peers and its own history.  

James Klempster, deputy head of the Liontrust multi-asset team, says: “We believe that marginal demand will return and valuations should mean revert as a result. This will not be an overnight phenomenon and while the market is in the doldrums it is difficult to imagine a different tone to sentiment but, over the longer-term, cycles do revert. 

“Today, the UK looks to be among the more settled developed markets politically, and this stability could be a source of positivity among investors towards the market.”

Klempster says while the more domestically focused UK small caps have been particularly hard hit over the past year, he believes they are likely to have greater potential for future growth than the FTSE 100 index.

“This would be particularly the case if any tariffs imposed on UK exports to the US creates market friction,” he adds. “Valuations for UK small caps are at multi-decade discounts to international peers.  

“It is true that UK smaller companies have suffered, like their US counterparts, amid recent sell-offs. But over the longer term, we continue to believe in the small-cap premium, and the short-term re-ratings could present an opportunity.