Maybe things aren’t so gloomy for UK equities after all. Despite tepid economic growth in the second half of last year and a tax-raising Autumn Budget in October, investor confidence in UK equities has risen by 6% this month, according to investment platform Hargreaves Lansdown.
Perhaps more impressive is the fact that the UK has bucked the trend. Confidence in every other region fell, with investors 14% more negative on emerging markets and 11% more negative on Japan. Although North America remains the region with the highest level of confidence overall, investors are now less positive than they once were, with confidence plummeting by 13% in February.
To some extent, this mirrors what we are seeing in stock markets. The FTSE 100 has hit several record highs so far in 2025, and is up almost 6% since the start of the year, at the time of writing. Meanwhile, the S&P 500 (which delivered more than double the FTSE’s return in 2024) is off to a slower start than its British counterpart, up just over 4%.
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The US stock market had a strong run after Donald Trump’s election win in November, buoyed by the prospect of deregulation and tax cuts. However, the start of his tariff agenda has introduced a greater degree of uncertainty in recent weeks.
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The launch of Chinese chatbot DeepSeek also threw the US tech sector a curveball in January, indicating that China might not be as far behind America in the AI race as previously thought. Stock market darling Nvidia, the US chipmaker, saw dramatic losses in the aftermath and its share price has only just recovered to where it was at the start of January.
Commenting on the latest developments, Victoria Hasler, head of fund research at Hargreaves Lansdown, said: “The inauguration of a new president in the US has brought speculation of policy change, and with it the potential for trade wars. Meanwhile, geopolitical instability and conflict still dominates headlines. In such uncertain times, investors have retrenched into what is most familiar to them – domestic UK equities.”
But what about the Budget?
Investor confidence in UK equities appears to have risen in recent weeks – but what about the Budget-related tax changes that will kick in from April? Businesses and investors have been deeply critical of chancellor Rachel Reeves’s decision to raise employers’ National Insurance contributions, arguing that it will push inflation up and make growth challenging.
In a recent survey of 52 leading retailers, conducted by the British Retail Consortium, 67% said they were planning to raise their prices this year to offset the effect of the tax hike. More than half (56%) said they were planning to reduce their employees’ hours or overtime, while around half of the respondents said they were planning to reduce their headcount. Some commentators have also warned that the tax changes will lead to fewer (and smaller) wage increases for employers.
“All of this takes more money out of the real economy through rising unemployment and inflation, and provides a headwind to earnings,” Jason Hollands, managing director at investment platform Bestinvest, recently told MoneyWeek.
Despite this, the latest data from Hargreaves Lansdown suggests confidence in UK economic growth rose by 7% in February, outpacing even the renewed optimism in UK equity markets (which is up 6%).
The latest UK GDP figures from the Office for National Statistics (ONS) also showed that the economy unexpectedly stuttered into life at the end of last year, growing by 0.1% in the final quarter. In 2024 as a whole, the economy grew by 0.9%, up from 0.4% the year before.
While a higher-than-expected GDP figure is good news, it is less of a cause for celebration when you remember that UK growth before the 2008 financial crisis averaged around 2% a year. Britain still has a significant growth problem on its hands, and the Bank of England recently slashed its 2025 growth forecast in half from 1.5% to 0.75%.
Why, then, is confidence up? Hasler puts it down to the “relatively stable political picture in the UK compared to much of the rest of the world”, as well as December’s “benign” inflation reading of 2.5%.
It is also worth noting that the rise in investor confidence in the UK was off a low base. North America is still the region with the highest absolute confidence, according to Hargreaves Lansdown, while confidence in the UK remains lower than most of the rest of the world, barring Europe. But could this be the start of a shift?
Temporary boost or longer-term shift?
Whether this is a temporary boost or the start of a longer-term change will depend on how various economic and geopolitical narratives play out. If Donald Trump introduces widespread tariffs, for example, it will be bad news for the global economy – but the American consumer is likely to bear the brunt.
A general rule that has been quoted by economists at Goldman Sachs, among others, is that each time the average tariff rate goes up by one percentage point, the rate of core US inflation goes up by around 0.1 percentage points. If the US economy becomes challenged, investors could be encouraged to shop closer to home when deciding which companies to back.
Monetary policy will also play a role in determining the outlook. Most economists are expecting the Bank of England to cut UK interest rates around four times this year. This should reduce pressure on UK businesses – although it is worth remembering that part of the reason rates are now being cut is that growth concerns are becoming more pressing.
Meanwhile, officials at the Federal Reserve (including chair Jerome Powell) recently said they were “not in a hurry” to lower US interest rates further. Polling from news agency Reuters indicates the Fed will probably cut rates twice this year, however the range of responses was wide, with no majority view among economists. This suggests we could see a divergence between the UK and the US when it comes to monetary policy, with greater uncertainty and a slower pace of cuts across the pond.
While headline inflation in the UK could hit 3.7% in the third quarter of the year, according to the latest forecast from the Bank of England, the Monetary Policy Committee has said that domestic inflationary pressures are waning. It is global energy prices that will drive the spike rather than challenges in the UK. Meanwhile, in the US, Trump’s tariff regime could unleash bigger problems.
There are still a lot of ifs, buts and maybes – and April’s tax changes could act as another stumbling block for UK companies and the economy. However, for now, this latest news is welcome.
