UK Equities Surge: Why International Investors Are Turning to the Atlantic

The U.S. equity market's dominance is fading as global investors seek refuge in undervalued European and UK markets. Amid rising U.S. policy risks—from tariffs to inflation—the iShares MSCI United Kingdom ETF (EWU) and the EURO STOXX 50 ETF (FEZ) are emerging as strategic diversification tools. With UK equities delivering a 6.67% year-to-date (YTD) return and European stocks outperforming U.S. benchmarks, now is the time to act.

UK Equities: Momentum Amid Valuation Discounts

The FTSE 100's YTD rise of 545 points (6.67%) has pushed it to an all-time high of 8,908.91, driven by strong UK economic fundamentals. GDP grew 1.3% annually in Q1 2025, outpacing the U.S. contraction of -0.1%. Key sectors like energy (Shell, BP) and pharmaceuticals (AstraZeneca) are fueling this momentum.

While EWU trails its category average, its 5-year return of 5.99% outperforms broader European averages and underscores its resilience. Technical indicators further suggest upward bias: its price sits +4.46% above its 50-day moving average, with Bollinger Bands signaling consolidation ahead of a breakout.

Valuation Advantages: The UK vs. U.S. Comparison

The FTSE 100's P/E ratio of 17.48 is cheaper than the S&P 500's 20.5, and well below its own historical peaks. Meanwhile, the EURO STOXX 50's P/E of 13.76 offers even greater value. These discounts reflect investor skepticism toward U.S. markets, where earnings growth faces headwinds from tariffs and geopolitical instability.

Dividends amplify the UK's appeal: the FTSE 100's 3.2% yield (vs. the S&P 500's 1.7%) provides a hedge against volatility. AstraZeneca, the index's largest constituent, exemplifies this: its shares may face near-term tariff risks, but its forward P/E is projected to fall to 16.4 by 2027, aligning with its $80 billion revenue target.

European Exposure: The FEZ Case for Diversification

The FEZ ETF, tracking the EURO STOXX 50, has delivered a 20.83% 1-year return, outperforming the S&P 500's 5.3% gain. Europe's sector mix—dominated by financials, industrials, and tech—benefits from its 11.91% projected EPS growth, while its 3.2% dividend yield matches the FTSE's generosity.

European equities also benefit from valuation discounts: the region's price-to-book ratio of 2.02 remains reasonable, especially against the U.S. tech-heavy overhang. Investors seeking hedged exposure can pair FEZ with currency-hedged alternatives like the CurrencyShares Euro Trust (FXE) to mitigate USD strength risks.

The Shift from U.S. Dominance: Policy Risks and Currency Dynamics

President Trump's tariffs—targeting Apple iPhones and EU goods—have intensified U.S. market instability. The S&P 500's Q1 decline of 4.3% and rising recession probabilities (54%) reflect this. Meanwhile, the UK and Europe thrive on sector-specific strengths:
- Energy: Rising oil prices and clean energy investments buoy BP and TotalEnergies.
- Defence & Tech: ASML and SAP SE leverage geopolitical tensions to drive growth.
- Luxury & Healthcare: LVMH and AstraZeneca benefit from global demand and innovation.

The British pound's 4.2% rise YTD versus the dollar further boosts EWU's returns for USD-based investors.

Actionable Takeaways for Investors

1. Allocate to EWU: Capture UK momentum with a focus on dividends and energy/tech exposure.
2. Pair with FEZ: Diversify into Europe's undervalued sectors and higher growth trajectories.
3. Monitor Policy Risks: Stay agile on U.S.-EU trade developments but prioritize valuation-driven opportunities.

The writing is on the wall: U.S. markets face headwinds, while the UK and Europe offer compelling valuations and dividend payouts. With the FTSE 100's P/E at a 5-year premium but still cheaper than the S&P 500, now is the moment to rebalance portfolios toward the Atlantic.

Investors who act swiftly can secure a piece of this rising tide before valuations normalize—and before the next U.S. policy storm hits.