A few months ago, in the immediate wake of Donald Trump’s re-election, a journalist invited me to come up with a selection of ‘Trump-proof’ UK stocks. I politely declined, for the simple reason that I feared ending up looking like a complete idiot.
The lack of clarity surrounding Trump’s policy on trade tariffs was genuinely bewildering back then. It seemed no-one – including the President himself – could truly say what he had in mind. This meant the scope for appearing foolish was just too great.
We now know, of course, that the master plan was even more disruptive than most people had dared imagine. Not even a group of islands populated only by seals and penguins was spared the most punitive tariffs in more than a century.
Yet maybe the biggest surprise amid the resultant market mayhem was that many of the least Trump-proof stocks turned out to be in the US. The S&P 500 index in particular went into a tailspin, suffering fluctuations of a severity not witnessed since the global financial crisis.
Above all, the so-called Magnificent Seven saw trillions wiped off their collective value. This was surely the final nail in the coffin of spurious suggestions that backing only a tiny clique of technology titans could ensure long-term investment success.
So what would I say if I were asked to highlight a handful of Trump-proof UK stocks today? Frankly, given the sheer unpredictability of the declarations emerging from the Oval Office, I might be tempted to turn down the offer again.
Yet I would say this much: the case for investing in many UK businesses could be stronger now than it has been for several years. Against most expectations, tariff chaos has so far been to the US’s loss and the UK’s gain – including in the smaller companies arena.
The long wait for a turnaround
To understand why its investment appeal has been boosted, we first need to revisit why the UK has been out of favour for so long. You may have heard all this before – I have certainly said it often enough in recent years – so I will try to be brief.
There is perhaps an argument for starting with Brexit. But we can cut to the chase and fast-forward straight to the advent of Covid-19, which ushered in a prolonged period of heightened inflation and elevated interest rates around the world.
The war in Ukraine subsequently heaped fresh turmoil on Europe. It led, for example, to steep rises in energy prices, exerting further pressure on struggling businesses – smaller companies frequently foremost among them.
Against this challenging backdrop, the UK staggered through a spell of political disarray. We somehow contrived to install three prime ministers and four chancellors in 2022 alone – not a great look in the eyes of the wider investment community.
Labour’s general election victory was tipped to bring a measure of stability but the jury is still very much out on that score. Both the Autumn Budget and the Spring Statement did little to showcase the attractions of UK markets.
On the whole, then, the story has been one of patiently waiting for something good to happen. Investors have been biding their time, hoping for some sort of positive catalyst to reignite their interest.
Well, I guess the world works in mysterious ways sometimes. Ultimately, the UK is suddenly back on the radar because something bad has happened. The catalyst has been negative. Thank you, mister president.
Strengthening the investment case for UK smaller companies
With US stocks wavering, the importance of prudent diversification has returned to the spotlight. Investors are no longer barrelling along a one-way street to the S&P 500, with every other market loitering on the pavement – or sidewalk – and desperately yelling: “Take me with you!”
The potential merits of expert stock-picking and active management are also earning renewed attention. This is because, given their sizeable stakes in the likes of the Magnificent Seven, index-tracking passive strategies have taken something of a battering.
In addition, despite the tumult, many US companies are still trading at a premium. By contrast, many UK businesses remain remarkably cheap.
We continue to see notable value in smaller, dynamic companies that are highly innovative and capable of seizing on emerging opportunities. Historically, small-caps have outperformed their large-cap counterparts over time, albeit with the possibility of more volatility.
The high-growth businesses among our current holdings include Alpha Group International, which provides foreign currency services, and Filtronic, which manufactures components for telecommunications systems. We expect both to significantly increase their revenues and profits over the next couple of years.
Are they absolutely Trump-proof? All things considered, it would take a brave fund manager to claim any business is capable of comprehensively ticking that box.
In the grand scheme of things, though, there are fresh grounds for believing UK companies such as these represent solid long-term investments. Whisper it, but they may even represent better investments than the US stocks that have dominated headlines – previously for all the right reasons, now for plenty of wrong ones – for so long.
Eustace Santa Barbara is co-manager of the IFSL Marlborough Special Situations, UK Micro-Cap Growth and Nano-Cap Growth funds.