Specific Market Reviews – United Kingdom
- We had been getting used to a string of relatively positive economic data with unemployment at its lowest since 1975 and improved investment and productivity. This was abruptly halted by a paltry 0.2% rise in Q1 GDP, the lowest growth number since 2012 and too weak to be attributed solely to the ‘Beast from the East’. Data since has been mixed but growth certainly feels a bit ‘subdued’ with the High Street the most visible sign of pain. Even Costa Coffee is not immune from declining sales growth despite offering the most delectable gastronomic experience known to man, a flat white coupled with Belgian chocolate tiffin. Inflation seems to have peaked despite the horrible rise in fuel prices, the April and May CPI numbers being up 2.4% y/y, the lowest prints for a year and well down from the peak of 3.1% at the end of 2017. In truth, there is way too much analysis of the UK economy with every item of economic news tiresomely being seized upon (and distorted) by the leavers or remainers to support their obsessions.
- Mark Carney, just what can you say? I’ve been lambasting his flip- flops on market guidance for years and the kindest you can say is that he remains consistent in his inconsistency. Having implied at the end of last year that there would only be two rate rises in the next three years he did a 180% volte-face in February and virtually carved in stone that there would be an interest rise in May. Typical of Carney, the trigger wasn’t pulled though the MPC voting seems to be shifting more hawkish so we expect a 0.25% rise this year, possibly in August and if not then in November.
Markets sometimes react to certain key drivers in a manner that becomes almost Pavlovian. Currently the single most important driver of the FTSE, certainly in a relative sense to other global markets, is the direction of sterling. A weak sterling is a significant tailwind, a stronger pound a significant headwind and as sterling has waned over the last few months the big overseas earners in the FTSE 100 have seen a real fillip to their share prices and been the main factor in propelling the index back towards its highs.
As we have been saying for several quarters UK equities are the most unloved asset class in the world, shunned by overseas investors ever since the Brexit vote. There are though several reasons why the romance could be rekindled. The FTSE All share yields nearly 4%, the biggest gap over 10 year Gilts (1.3%) since WW2. The P/E of 13.5x is not too far above the long-term average and cheaper than overseas markets such that the UK is looking reasonable value. There is maybe also a sense that we have seen Peak Brexit (slowly moving to a fudge on all sides and issues), Peak Corbyn (poor local elections) and Peak Household Squeeze (inflation falling, wages rising). Add in the stalling rally in the pound and it is maybe no surprise that the UK market is starting to shed its pariah status and play catch-up with other developed markets.
Domestic and foreign investors may have been turning their noses up at the UK stock market following the Brexit vote but the same cannot be said for the corporate world with the relatively low valuations of UK domestic sticks generating a very healthy level of M&A with Melrose/GKN, Clydesdale/Virgin Money, Takeda/Shire Pharmaceutical and Sainsburys/Asda the most headline grabbing.
Summary: Brexit and the prospect of a Corbyn government remain dark clouds but one gets the sense that the UK is emerging from its pariah status in the eyes of global investors. Valuation is not overtly expensive alongside a noticeably high dividend yield, the earnings outlook is good and M&A activity is strong