UK defence stocks soar while hopes of avoiding Trump tariffs help FTSE100: Richard Hunter
The so-called “Trump trade”, which had excited investors at the end of last year, may now have taken on negative connotations.
Each of the main indices ended February down on the month, unable to shake off inflationary concerns arising from the President’s initially aggressive tariff moves. As things currently stand, the levies on Mexico and Canada, as well as an additional tariff on China, will take effect today with some retaliatory action all round a possibility.
The EU is also in Trump’s sights for reciprocal tariffs at the beginning of April, while an extraordinary televised spat with the President of Ukraine in the Oval Office did little to ease geopolitical fears on Friday.
The heightened volatility comes at a time when some cracks are beginning to appear in the US economy, prompting stagflation concerns. The Atlanta Fed’s GDP Now measure, which seeks to track the US economy on a real time basis, estimated a first-quarter decline of 1.5 per cent versus previously projected growth of 2.3 per cent.
There has also been a fall in consumer sentiment, where the immediate outlook has weighed on prospects on what is a vital cog in the economy.
At the same time, mixed technology outlooks, concerns around the level of AI spending and heightened valuations have combined to push the Nasdaq into negative territory for the year.
In the meantime, trade and policy frictions are likely to remain centre stage, weighing on each of the indices, where in the year to date the Dow Jones has added 3 per cent and the S&P500 1.2 per cent, while a decline of 2.4 per cent for the Nasdaq reflects the current pressure on big tech in particular.
Some upbeat factory data from China showed that new orders rose in February alongside higher output, although it remains to be seen how much of this relates to companies buying quickly prior to the implementation of the new tariffs.
In addition, cost-cutting at the corporate level meant that employment remained under pressure, and the overarching threat of the imminent tariff implementation is one which investors are unable to ignore. The very real possibility of retaliatory measures from the Chinese authorities adds an extra level of unpredictability which could prove to be to the detriment of the economies and markets of both countries.
With neither particular exposure to the mega cap tech risks nor indeed, at least for the moment, to tariff threats, the UK has ploughed ahead, with the premier index increasingly garnering investor attention given its perceived defensive qualities.
Having finished February at a record closing high, March has also started on a sprightly footing, with the FTSE100 making further progress in early trade.
The index has now gained 8.2 per cent in the year to date, quite apart from its more traditional attraction of a healthy average dividend which currently stands at 3.5 per cent, boosting investors’ total returns.
The index further turned defence into attack as wider geopolitical concerns again lit a fire under the likes of BAE Systems and Rolls-Royce, whose shares gained 18 per cent and 6 per cent respectively in opening trade.
BAE gained additional momentum from a broker upgrade, as was also the case for Qinetiq in the FTSE250, where the company previously known as the “James Bond stock” given its ground-breaking developments of technical warfare prevention measures, added 9 per cent in early exchanges.
Richard Hunter is head of markets for interactive investor