Why are the UK and Europe trumping the US?

Hello it's Thursday 1st of May. Good news therefore, if you've had enough of 2025 already, we're already a third of the way through it. And it's been quite an interesting one for market participants. I think it's fair to say that the overall tone of news, certainly in the last couple of months, has been challenging and probably a little bit on the pessimistic side overall. So it's no surprise that some markets have certainly sold off over the course of 2025. It's been a bit of a mixed bag actually though, the US is off around about 10% in sterling terms over the year-to-date period. The UK is up about 5% and Europe's actually up nearly 10% in sterling terms over the course of the year. So it really is a sort of a mixed picture out there.

Given the level of uncertainty, perhaps the sell-off is understandable. There's a lot of things we don't really have a handle on yet. Tariffs for example, which businesses in which regions will be able to navigate their way through it successfully, which will have their business model impinged upon and how much and for how long, all really remain to be seen. So there is, it's fair to say, an increase in uncertainty and when uncertainty manifests itself, you find that markets tend to, on balance, sell off. And that's certainly what we've seen in the US so far. A lot of it really I suppose, stemming from the new presidency in the US, and in the build up to that election, there was a lot of good news coming in to the price and expectations got you know, elevated and perhaps a little bit ahead of themselves. And that was on top of already what we believe to be pretty high valuations in the US, whereas other parts of the world have been left behind from a valuation perspective. Year-to-date, and certainly in the last couple of months perhaps we've seen the reverse. The US is obviously the epicentre of the bad news with it being the home of the tariffs and all the other political pronouncements as well. We talk a lot about tariffs in these videos, but I think it's fair to say the presidency so far in the US has been not so much a cat amongst the pigeons as a whole cattery when you think about NATO, If you think about upending long-standing strategic alliances, when you think about the shots across the bow of the Federal Reserve, think about Ukraine and all sorts of other things in between, it really has been a mixed bag. And so you can understand perhaps why the US has sold off and why it sold off most because it was the markets that are coming into this with the best overall picture priced in. And when we think about income that goes to shareholders, we think about it as an income stream, you do get a valuation multiple applied to that and you know ultimately that's where sort of subjectivity comes in. In a general sense the the income, the revenue, the profitability that stems from that revenue is broadly speaking at least objective and measurable certainly from a historical perspective. Now there are funnies and accounting wrinkles that can come in, but on the whole it's sort of consistently applied and therefore sort of vaguely objective. But obviously valuations put on top of that are essentially subjective. It's a combination of what people feel about the long-term prospects of a market or business. Can they grow those profits faster than other people or is there some sort of inherent quality built in that justifies that premium? And certainly in the US over the last few years, this notion of exceptionalism has allowed I suppose, a narrative to build, whether it be on the growth side, implying that technology stocks will continue to grow faster than anybody else for all the reasons that we've gone into in previous videos, but obviously AI related most recently, or perhaps because there's some quality in those businesses, or indeed the broader US stock market, the sort of dependability, the rule of law, the scale and everything else that has justified a higher price earnings multiple as well. But obviously when you take the label off these income streams, if you just sort of looked at them next to each other, if you like, you wouldn't necessarily be able to tell them apart. It's a bit like if you had a brand of cola and a supermarket cola next to them, if you took the labels off, you would not necessarily be able to tell them apart, you won't be able to presume one of them is higher quality for one reason or another and therefore you'd struggle to justify paying a difference for them. And perhaps what we've seen over the course of this year is a sort of moving away from this notion of exceptionalism and rotation away from being willing at almost any price to pay up for the US and judge the peers elsewhere on a more fundamental level rather than essentially allowing that low valuation to perpetuate.

And in fact oddly enough in an era where in a year certainly where we've had loads of uncertainty globally it's quite interesting to see the likes of UK and Europe actually do well over the course of the year-to- date. Clearly we've been very positive, and I'm sure you know this, we've been very positive on the UK for a number of years. We've had it as a 4 out of 5 in our tactical scoring matrix. So it really is music to ears to hear other people find a more constructive view on the UK and seeing valuations go up. But you can argue that it's a bit odd to see all that increase in uncertainty around the world and yet people are willing to pay more today for Europe and the UK than they were willing to pay six months ago when a lot of these uncertainties were still very much an imagination scenario rather than a reality. So perhaps it's not a case of people are irrationally getting excited about Europe and UK today, but perhaps it was more a case that they were irrationality negative on them over the course of last year and penalising valuations rather than now overpaying. And certainly, if you look at the ratios, the valuations you're seeing in Europe and the UK, they're certainly not challenging by any means. That adds some sort of credence to that argument, less of an irrational jump into the UK and Europe and more a case of moving out of the US and moving elsewhere. It's sort of suggestive of the fact that there is still risk appetite out there. People are still looking to invest in equity markets, but clearly the marginal flow that might have gone very naively into the US only a few months ago, is now thinking actually on balance perhaps I need to look somewhere else, perhaps I need to diversify away. And so what you're clearly seeing in terms of flow is a drift away from US markets and US capital markets and most notably the equity market into other pockets that are deemed to be similarly resilient, similarly safe from a political angle, perhaps even safer in many ways as of today, but at a much, much less challenging valuation than you see still pervading in the US.

To us, what this really demonstrates is the importance of diversification. Having different sectoral allocations, different stylistic allocations and having different geographical allocations clearly does have some benefit in times like this. The markets aren't all moving in lockstep and so you get some diversification benefit even within those particular asset classes. I think it also demonstrates why you need a long-term and a patient process, one that looks through short-term valuation moves, which are often sentimentally driven, reliant more on fundamentals to identify long-term opportunities and then the discipline really to stick with it when the going is tough, rather than throwing in the towel because had you done that you know last year when the UK for example very much unloved, clearly you would have missed out so far this year. Now clearly we don't want to declare victory, it's not a moment for making that point. Things can change very quickly in markets, but what I think it does demonstrate again is just the importance of keeping a broad range of returns drivers in your portfolios rather than being overly subject to any one particular market. And of course the ones that have done well in the past don't have a divine right to keep doing well in the future, and so in some ways looking for more unloved areas to invest, you know it keeps you in the cheaper end of the spectrum and all being equal might well give you a better opportunity, certainly a better risk-adjusted opportunity from here. That's it from me. Have a good weekend when you get there and we'll see you next time.