UK growth: finding opportunities amid tariff turbulence

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Recording a podcast about UK growth companies’ prospects less than 48 hours after President Trump’s ‘liberation day’ tariff announcement is a reminder of how events can reshape conversations. The ramifications of the US’s import taxes are likely to be wide-ranging, although even now, a week later, their eventual scale and scope remain unclear. Yet for Baillie Gifford’s head of UK Equities, Iain McCombie, the task at hand is unchanged: investing in businesses with long-term growth potential.

“What’s now important is how company management teams adjust to the uncertainty,” says the investor who also jointly manages the Baillie Gifford UK Growth Trust alongside Milena Mileva.

“If you think about the past years, we’ve had Covid, currency crises and Brexit – and good leaders adapt to the changing circumstances. That’s where we spend a lot of our time: trying to understand companies, their long-term thinking and how adaptable they are.”

The latest Short Briefings on Long Term Thinking episode explores how the UK government’s growth plans relate to McCombie’s portfolio companies. Prime Minister Sir Keir Starmer has pledged to “slash red tape”, “kickstart growth” and “encourage long-term investment”, adding that the US tariffs “don’t so much change as turbocharge” the initiative. McCombie eyes the effort with cautious optimism.

“One of the big problems that I’ve heard companies talk about is the growing burden and bureaucracy of doing business. So anything that’s looking to reverse that would be really good news. And a bit of pump priming is not a bad thing. My caveat is that all this is hard to do.”

While the companies his team invests in are primarily UK-listed, McCombie notes that they don’t equate to the UK economy, reflecting another reason to suggest the government’s endeavours won’t solely determine their fate.

“They’re often global businesses with operations all over the world. And even within the UK economy, what’s attractive to us are pockets of growth and where somebody’s come up with a business model that’s taking market share and has an innovative product. We’re very much bottom-up investors, meaning we start by trying to find individual ideas with long-term growth potential.”

Advanced manufacturing

With these qualifications in mind, the conversation turns to the government’s Invest 2035 strategy, a 10-year industrial plan promising to prioritise a handful of “growth-driving sectors”. These overlap areas where McCombie and his colleagues have long focused on finding exceptional companies.

In advanced manufacturing, for example, Baillie Gifford has continuously held a stake in Renishaw since 2002. The Gloucestershire-based engineering firm specialises in making probes, sensors and other products that enable precise measurements and high degrees of control. Applications range from manufacturing semiconductors and aeroplane engine blades to calibrating and operating robots and other automated systems.

“In engineering, if about 5 per cent of your capital expenditure is on research and development, that’s probably pretty good. This company is spending almost triple that amount because they know they have to be at the cutting edge,” McCombie observes.

One of the firm’s other specialisms could also mean trade restrictions play at least partially in its favour. Renishaw makes industrial 3D printers that build intricate components out of metal powders. This is already one of the fastest-growing parts of its business, and if companies bring manufacturing onshore to reduce reliance on imports, it could supercharge demand.

“Sometimes, with things like these big shocks and threats, there are also opportunities,” McCombie says. “And this might be one.”

Bodycote is another holding in the advanced manufacturing sector. The Cheshire-based firm specialises in manufacturing processes involving very high temperatures and pressures. Automotive, aerospace and energy companies are among those making use of its services.

Creative industries

Turning to the creative industries, McCombie points to Games Workshop. The firm makes its fantasy war game miniatures in Nottingham and sells them via its chain of more than 500 stores worldwide, as well as other retailers.

“We were initially worried that kids would see this as old-fashioned and prefer video games,” McCombie recalls. “But it’s the opposite. People are more interested than ever because it serves a different purpose to the digital world, and painting the characters can be good for concentration.”

Baillie Gifford is now the company’s largest institutional investor and others are also sitting up to pay notice. Last December, Games Workshop entered the FTSE 100 index and announced it had licensed Amazon the rights to turn its Warhammer universe into films and a TV series after years of negotiations and rejecting other suitors.

“Games Workshop has very rich intellectual property that it’s built up over 30 years and is very protective of it,” McCombie says. “It’s trying to think genuinely long term and wants to make sure that the production levels and storylines will stay true to its high standards.”

Luxury fashion house Burberry is a second portfolio company that plays a leading role in the creative sphere. In recent months, the firm has embarked on an effort to trim costs and redirect attention to its hallmark products, including its famous trench coats and apparel featuring its signature tartan check print.

Digital and technologies

The UK government highlights the “rapid development of artificial intelligence [and] digitalisation” as having potential in a third high-growth sector, ‘digital and technologies’.

McCombie and his colleagues have exposure to several companies in this field. They include Wayve, one of the UK’s highest-valued AI startups, following a $1bn funding round that added NVIDIA, Softbank and Uber to its backers last year.

The London-based private company is developing self-learning software to power driverless cars. Rather than creating a complex system of human-coded rules or curating an expensive library of labelled data, as others have tried, the firm is training ‘general purpose’ models to draw on recorded vehicle camera videos and hyper-detailed simulations to teach themselves how to perceive, reason and plan.

“The key now is whether Wayve can get car companies to sign up, but we’re hopeful because we think this is the way to crack the problem,” McCombie says. Days later, Nissan announces an agreement to install Wayve’s software into its cars from 2027.

The UK Equity Team has also backed Kainos, Softcat and FD Technologies, which help their clients extract greater value from data and implement existing AI technologies.

And McCombie also highlights the role of one of his biggest holdings, Auto Trader, in this digital field. The Manchester-headquartered firm stopped publishing its eponymous magazine over a decade ago and today relies on the internet to connect buyers with car dealers and other sellers.

“It’s 11 times bigger than the number two player and 14 times the number three: that’s dominance,” says McCombie.

He adds that the firm is pursuing further growth by extending into related services, such as helping shoppers secure finance for car purchases, for which it charges a commission.

Resilience and ambition

Other topics in the podcast include the UK Equity Team’s investments in financial services companies, such as Wise, the money transfer service, and Experian, one of the biggest aggregators of information about consumer debt.

Additionally, McCombie discusses how the government’s house-building ambitions could benefit ventilation and heating equipment maker Volution Group. New legislation to minimise health risks caused by dampness and mould will encourage builders to install its products into many of the targeted 1.5 million new homes, he explains.

Finally, bringing things full circle, the Baillie Gifford partner returns to the topic of taking a long-term perspective and continuing to seek out resilient and ambitious companies in these changing times.

“We hold to the view that you want to own a portfolio with companies with strong fundamentals and management teams that can exploit them,” he says. “Over the long term, share prices follow fundamentals.”

“History teaches you to be an optimist. Backing the human spirit, backing human ingenuity – that’s what buying equities is all about. And in the long run, you’re right to do that.”

Words by Leo Kelion

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