As investors grow weary of the US, confidence in UK stocks soars

As the domestic market begins to appear to be a relatively calm place, investors are becoming more interested in UK stocks

Perhaps things aren't as dire for UK stocks as they seem. Investor confidence in UK stocks has increased by 6% this month, according to investment platform Hargreaves Lansdown, despite weak economic growth in the second half of last year and a tax-raising Autumn Budget in October.

The UK has defied the trend, which is perhaps even more impressive. Investors became less optimistic about emerging markets by 14% and Japan by 11%, while confidence declined in all other regions. Despite the fact that North America continues to have the highest level of confidence overall, investors' optimism has declined, with confidence falling by 13% in February.

This somewhat reflects the current state of the stock markets. As of this writing, the FTSE 100 is up nearly 6% since the year began and has already reached multiple record highs in 2025. In contrast, the SandP 500, which more than doubled the return of the FTSE in 2024, is starting the year more slowly than its British counterpart, up just over 4 percent.

With the promise of tax cuts and deregulation following Donald Trump's election victory in November, the US stock market saw a strong run. But there has been more uncertainty in recent weeks due to the beginning of his tariff agenda.

Additionally, the January launch of the Chinese chatbot DeepSeek caught the US tech industry off guard by suggesting that China may not be as far behind the US in the AI race as previously believed. In the aftermath, the US chipmaker Nvidia, a stock market darling, suffered severe losses, and its share price has only recently returned to its January beginning level.

In response to the most recent events, Victoria Hasler, head of fund research at Hargreaves Lansdown, stated: "The US presidential election has sparked rumors of policy changes and the possibility of trade wars. Meanwhile, the news continues to focus on geopolitical unrest and conflict. Due to these uncertain times, investors have turned to domestic UK stocks, which are their most familiar investments.

What about the budget, though?

The decision by chancellor Rachel Reeves to increase employers' National Insurance contributions has drawn harsh criticism from businesses and investors who believe it will increase inflation and make growth difficult. Investor confidence in UK stocks seems to have increased in recent weeks, but what about the tax changes related to the budget that will take effect in April?

52 major retailers participated in a recent British Retail Consortium survey, and 67 percent of them stated they intended to increase prices this year in order to counteract the impact of the tax increase. Approximately 50% of the respondents stated they intended to cut their headcount, while over half (56%) stated they intended to cut employee hours or overtime. Some analysts have also cautioned that employers will see fewer (and smaller) wage increases as a result of the tax changes.

Bestinvest's managing director, Jason Hollands, recently told BFIA, "All of this takes more money out of the real economy through rising unemployment and inflation, and provides a headwind to earnings."

Despite this, according to recent data from Hargreaves Lansdown, confidence in UK economic growth increased by 7% in February, surpassing even the resurgence of optimism in UK equity markets, which saw a 6% increase.

According to the most recent UK GDP data released by the Office for National Statistics (ONS), the economy unexpectedly stumbled into life at the end of the previous year, expanding by 0.1 percent in the last quarter. Overall, the economy expanded by 0.9 percent in 2024, up from 0.4 percent in the previous year.

Although an above-expected GDP figure is encouraging, it is less reason for celebration when one considers that, prior to the 2008 financial crisis, UK growth averaged about 2 percent annually. The Bank of England recently slashed its 2025 growth forecast in half, from 1 percent to 0.75%, indicating that Britain still faces a serious growth challenge.

So why is confidence up? Hasler attributes it to the "relatively stable political picture in the UK compared to much of the rest of the world" and December's "benign" inflation reading of 2.5 percent.

It's also important to remember that the UK's investor confidence surged from a low starting point. Hargreaves Lansdown claims that North America continues to have the highest absolute confidence, while the UK continues to have lower confidence than the majority of the rest of the world, with the exception of Europe. Could this, however, be the beginning of a change?

A short-term boost or a longer-term change?

How different economic and geopolitical narratives develop will determine whether this is a short-term boost or the beginning of a longer-term shift. For example, if Donald Trump imposes broad tariffs, the global economy will suffer, but American consumers will probably be the ones who suffer the most.

Economists at Goldman Sachs, among others, have cited the general rule that the rate of core US inflation rises by approximately 0 to 1 percentage points for every percentage point increase in the average tariff rate. In the event that the US economy faces difficulties, investors may be persuaded to support local businesses.

The outlook will be influenced by monetary policy as well. The majority of analysts predict that the Bank of England will lower interest rates in the UK four times this year. This ought to alleviate the strain on businesses in the United Kingdom; however, it is important to keep in mind that the current rate cuts are partly due to growing concerns.

Jerome Powell, the chair of the Federal Reserve, and other officials recently stated that they were "not in a hurry" to further reduce US interest rates. News agency Reuters polling suggests the Fed will likely lower interest rates twice this year, but there was no consensus among economists. This implies that monetary policy may differ between the US and the UK, with more uncertainty and slower rate cuts in the latter country.

Although the Bank of England's most recent forecast for headline inflation in the UK suggests that it may reach 30.7 percent in the third quarter of this year, the Monetary Policy Committee has stated that domestic inflationary pressures are abating. The increase will be driven by global energy prices rather than UK difficulties. Trump's tariff policy in the US, meanwhile, may cause more serious issues.

There are still many ifs, buts, and maybes, and the tax changes in April may be yet another roadblock for the economy and UK businesses. For now, though, this most recent information is appreciated.