Investors are navigating an increasingly risky world. Months into the new US administration, the tariff regime remains a looming threat, but details are scant. Inflation appears to be reviving, with a potential impact on the interest rate cycle. The new US administration is changing the geopolitical goalposts, with unpredictable results. It feels like a vulnerable moment for stock markets.

Shires was launched in 1929 and has amassed some institutional memory about periods of risk. For us, one of the most important points to assess in an environment like this is whether the risks are well understood and reflected in share prices. It is where excessive risk collides with excessive optimism that stock markets tend to run into problems.

The UK market reflects a variety of risks. In addition to global risks, the UK’s domestic problems are well-understood: weak economic growth, poor productivity and mounting inflationary pressures. Those who invest in the UK market will be wearily familiar with the prevailing gloom. Nevertheless, the UK market is cheap as a result. There is no ‘irrational exuberance’. If anything, the pessimism has gone too far.

There are times in markets when being cheap doesn’t matter very much. That has certainly been true for the UK in recent history, where investors have been far more focused on growth over price. However, there are times when it is an advantage. We believe the current environment may be one of them.

If markets are volatile, and trading sideways, investors need income generation to generate a return. In this, the UK market has a clear advantage. As it stands, the sum of the dividend yield and the buyback yield for the UK market is almost 7%, approximately the long-run real return on equities.

In other words, to make a return from the UK market, all investors need is for those distributions to stay the same. They do not need ambitious growth projections to materialise. While it is still important to be selective, and to find companies that are well-managed, with strong balance sheets, that are growing earnings and dividends, the hurdle rate for success in UK equities is low.

Potential catalysts?

It is also worth noting that the outlook for the UK is not universally gloomy. While it would be a stretch to suggest that the UK is on the cusp of a significant recovery, there are factors that could improve the outlook for UK equities.

For example, the UK consumer has far less debt than its US equivalent. UK credit card debt usage is still low, which gives consumers the capacity to raise spending levels. Real wages are rising, with the last set of Official of National Statistics data showing year on year wage increases of 5.9% for the last quarter of 2024 . In the UK, people’s main store of wealth is their home, and that’s been a resilient asset over time.

The closed-ended structure of Shires means we can lean into these potential areas of growth and take a longer-term view. In the past, when we have seen these levels of pessimism about the UK economy, it has been an effective strategy to buy the highest quality names while they remain cheap. Today, this is companies such as Dunelm. It is a well-run business, with a compelling online presence, that continues to win market share. We see many similar opportunities in the UK market to buy quality companies at cheap prices.

There are other areas that might have an impact. Pension reforms could direct more capital to UK stock markets. If there is an enduring peace in Ukraine, there could be a peace dividend. Equally, confidence has been on its knees and while restoring confidence isn’t easy, little things – like swerving a recession in December – could start to change the narrative.

Contrast to the US

We would contrast this situation to that of the US, where optimism is high and significant assumptions about economic growth are built into share prices. Yet that economic growth partly rests on an increasingly fragile consumer. Not only is the US consumer more indebted, but a greater share of their wealth is also in the stock market, bitcoin and more speculative assets. If markets started to weaken, it could weaken consumer sentiment as well. There may be risks from the new administration for US companies as well as their global peers. The key difference is that these risks are not necessarily reflected in US valuations.

It is worth noting that the dominant ‘Magnificent Seven’ have looked increasingly fragile in recent weeks. Market leadership has been broadening out, and this may yet become the dominant theme for 2025. With the whole of the UK market only narrowly exceeding the size of Apple , it wouldn’t need much of the capital coming out of US mega-caps to be directed towards the UK to change the trajectory of the market. The $589bn that left Nvidia in a single day in January would buy BP 9x over.

At a risky time, investors need to ensure that risks are properly understood. The UK market already assumes that a lot will go wrong, and there is little optimism that anything will go right. The US market is the opposite. We know where we feel more comfortable.

Important information

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