British Equities Rally Amid as Trade Tensions Ease, but Risks Linger

The London Stock Exchange has seen a notable uptick in British equities this year, driven by progress in trade agreements and a strategic pivot toward global partnerships. The UK’s formal accession to the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) in February 2025, alongside ongoing negotiations with key economies like India and the Gulf Cooperation Council (GCC), has fueled optimism. However, the rally is not without challenges: domestic economic headwinds, EU regulatory friction, and geopolitical risks threaten to temper gains.

Trade Tensions Easing: The CPTPP Boost and Beyond

The UK’s entry into the CPTPP, which covers 13% of global trade and includes markets like Japan, Canada, and Vietnam, is a landmark achievement. With bilateral trade volumes of £120.85 billion in 2023 alone, this deal opens doors to Asia-Pacific markets, bolstering exports of financial services, pharmaceuticals, and technology. Meanwhile, the ESA-UK Economic Partnership Agreement, covering £2.03 billion in trade with Eastern and Southern African states, has also come into force, though Comoros’ delayed ratification highlights lingering bureaucratic hurdles.

Beyond these, the UK has 39 trade agreements in force with 73 partners, including the UK-Australia and UK-Japan Free Trade Agreements, which collectively account for £20 billion and £27.6 billion in annual trade, respectively. These deals are underpinning investor confidence in British businesses’ global reach.

The Domestic Drag: Fiscal Policy and Market Underperformance

Despite the trade optimism, UK equities face internal headwinds. The FTSE 250, which tracks domestically focused firms, has underperformed the FTSE 100 (heavy on multinational companies) this year. This divergence reflects weak domestic growth and the Spring 2025 Budget, which critics argue prioritized public-sector spending over private-sector growth. The government’s decision to raise borrowing costs to address a £4.57% gilt yield has further dampened private investment, leaving companies in sectors like construction and retail grappling with higher operational costs.

EU Reset: Progress, but Friction Remains

Efforts to “reset” UK-EU relations have focused on resolving lingering trade frictions, such as veterinary agreements for agricultural exports and fisheries access. However, deeper regulatory alignment—critical for sectors like automotive and pharmaceuticals—remains contentious. The UK’s Product Standards and Metrology Bill, allowing voluntary alignment with EU standards, has been criticized for lacking the teeth needed to secure smoother trade. With Prime Minister Keir Starmer’s planned summit with EU leaders in early 2025, the path forward is uncertain.

Global Crosscurrents: Trump, China, and the GCC

Externally, the UK faces a precarious balancing act. President Trump’s re-election has raised fears of U.S. tariffs on British exports, particularly in automotive and steel sectors. Simultaneously, the UK is navigating tensions between the U.S. and China, with Chancellor Jeremy Hunt’s planned visit to Beijing underscoring the need to manage investment flows and security concerns.

Negotiations with the GCC on an investment-focused agreement have shown promise, but disputes over clauses like Investor-State Dispute Settlement (ISDS) could delay finalization. Meanwhile, stalled talks with Switzerland highlight the complexity of aligning UK trade policies with EU frameworks.

Conclusion: A Cautionary Rally

British equities have rallied on the back of trade deal progress, but investors must weigh this against structural challenges. The CPTPP’s £120.85 billion trade potential and ESA agreement’s £2.03 billion boost are positives, yet domestic fiscal constraints—exemplified by the FTSE 250’s underperformance—are a drag. The Spring Budget’s focus on public spending, combined with elevated gilt yields, suggests the UK’s growth narrative remains fragile.

While trade tensions with the EU and U.S. may ease, geopolitical risks and regulatory gaps could limit the rally’s longevity. For now, British equities offer opportunities in export-driven sectors, but investors would be wise to hedge against the UK’s reliance on global stability—and its own fiscal missteps.

Final Word: The UK’s trade strategy is a step forward, but the path to sustained equity gains runs through Brussels, Beijing, and the Bank of England’s boardroom.