UK stocks receive boost in confidence as investors express skepticism toward the US market
Looks like there's a bit of a comeback for UK equities, despite some Rocky Roads lately. A recent survey by investment platform Hargreaves Lansdown shows that investor confidence has surged by 6% in the UK this month, while it's dipped in every other region. Even North America, which was previously the frontrunner, is now less positive, with a 13% dip in confidence since February.
The FTSE 100 has been hitting new highs this year, up nearly 6% since January, while the S&P 500, which saw more than double the FTSE's return in 2024, is lagging behind with a slight over 4% increase.
You might be wondering what's behind this sudden boost in UK equities. Well, it could be due to the "relatively stable political picture in the UK compared to much of the rest of the world". December's "benign" inflation reading of 2.5% might have also played a part.
But hang on, we've got the upcoming tax changes from the April Budget to consider too. Businesses and investors have been vocal about chancellor Rachel Reeves’ decision to raise employers’ National Insurance contributions, arguing it will drive up inflation and pose challenges for growth.
In a recent survey of 52 leading retailers, the British Retail Consortium found that 67% planned to raise their prices this year to offset the effect of the tax hike. Over half said they would reduce their employees' hours or overtime, while around half planned to reduce headcount.
Some commentators have warned that these measures will lead to fewer (and smaller) wage increases for employers. Even though confidence in UK economic growth has risen by 7% in February, it's still lower than most of the rest of the world, barring Europe.
So, will this be a temporary boost or the start of a longer-term shift? Well, that depends on how various economic and geopolitical narratives unfold. If the US introduces widespread tariffs, it could be bad news for the global economy, but the American consumer would likely feel the brunt of it.
The Bank of England is expected to cut interest rates around four times this year, which should reduce pressure on UK businesses. Meanwhile, the Federal Reserve might take a slower approach, leading to a divergence between the UK and the US when it comes to monetary policy.
Global energy prices could drive inflation, and Trump's tariff regime could lead to bigger problems in the US. There are still a lot of uncertainties ahead, but for now, it's looking somewhat brighter for UK equities.
Tax Changes to Watch Out For:
- Employer National Insurance Contributions (NICs): The rate is increasing by 1.2 percentage points from 13.8% to 15% from 6 April 2025, potentially increasing operational costs for businesses.
- Capital Gains Tax (CGT): Rates are increasing, with the lower rate rising from 10% to 18% and the higher rate from 20% to 24%, which might discourage investment.
- Non-Dom Tax Regime: The existing non-dom regime is being replaced by a new scheme based on residence, aiming to attract investment and talent to the UK. This could lead to short-term uncertainty among international investors.
- Carried Interest Taxation: From April 2026, carried interest will be taxed as income at 34.1%, which could impact investment decisions of venture capitalists and private equity firms.
These changes could have varying impacts on UK equities and the overall economy. Keep an eye on how businesses adapt to these changes and how they're perceived by investors.
- The recent surge in UK investor confidence, despite a dip in every other region, may be a sign of a comeback for UK equities.
- Raised Employer National Insurance Contributions, set to take effect from April 2025, could potentially increase operational costs for businesses, possibly impacting the growth of UK equities.
- The upcoming tax changes, including increased Capital Gains Tax rates, could discourage investment and affect the performance of UK equities.
- The new Non-Dom Tax Regime, aimed at attracting investment and talent, could lead to short-term uncertainty among international investors and influence their decisions about UK equities.
- The changing tax landscape, including the introduction of carried interest taxation from April 2026, will have varied impacts on UK equities and the overall economy, making it crucial to monitor how businesses and investors respond to these changes.
