The newest GDP figures, for the fourth quarter of 2023, advised many people what we already knew: the UK economic system is pretty stagnant. And with a fourth-quarter drop of 0.3% mixed with a 0.1% third-quarter fall, the UK is now technically in a recession.
Granted, not by very a lot. And certainly, over 2023 as a complete — and never the ultimate six months — the economic system really grew by 0.1%.
However annual development of 0.1% is equally nothing to get enthusiastic about, simply as a fall of 0.4% or so is hardly a harbinger of doom. Both method, although, the purpose is that prime minister Rishi Sunak’s promise of financial development isn’t being met. We’re simply flatlining, primarily.
What we’d like is a feelgood issue
A number of weeks again, I actually wasn’t certain that now was the time to put a wager on the economic system, and on London’s inventory market. America’s economic system, and America’s inventory market, appeared extra engaging.
My argument then was any financial stimulus would occur the opposite aspect of the final election that should happen within the subsequent twelve months. Till then, the economic system was simply treading water.
Now, I’m not so certain. Don’t get me mistaken: America continues to be engaging. However a technique or one other, it’s possible {that a} contemporary authorities would offer some certainty and confidence that the drift of the final couple of years would possibly come to an finish.
Put one other method, commentators are speaking up the similarities between now and 1997, when Labour below Tony Blair gained the final election. And sure, the 2 elections are certainly comparable
However assume again to what occurred after the election — a pointy improve in feelgood issue, as individuals noticed a authorities emboldened to behave. Consider Gordon Brown’s choice to make the Financial institution of England impartial, as an illustration, liberating it from political interference when it got here to setting rates of interest.
Increase instances over the Atlantic
Buyers have hardly been captivated with UK equities over the previous a number of months. The Funding Affiliation has been reporting web outflows from UK fairness funds, with the withdrawn money being reinvested in fixed-income funds and short-term cash market funds.
The explanation isn’t troublesome to determine. Take a look at the FTSE 100’s five-year efficiency: over 5 years, it’s up simply 6.8%. To save lots of you doing the maths, that’s an annual compound development charge of 1.7% — hardly stellar stuff.
America? Over 5 years, the broadly-based S&P 500 (a much more consultant index than the Dow Jones Industrial Common) had risen simply over 80%. That’s an annual compound development charge of 15.9%.
And once more, to avoid wasting you doing the maths, that signifies that the S&P 500 has outgrown the Footsie by over 9 instances.
No marvel, as soon as rates of interest started rising, fund managers began switching out of equities into fastened earnings funds: they want quarter-on-quarter development charges to report back to their buyers.
The place the bargains are
However sarcastically, that’s simply what they may begin to see within the coming months. As I mentioned, this financial drift won’t persist ceaselessly. And admittedly, it’s troublesome to think about {that a} change of presidency would possibly make issues really worse.
Though, come to think about it, that’s more-or-less precisely what occurred when Boris Johnson was changed by Liz Truss: markets tanked, spectacularly.
However we’ve obtained extra than simply hope to depend on. The details — and one reality particularly — go in buyers’ favour as effectively.
The UK inventory market is reasonable. The FTSE All-Share index is on a price-to-earnings ratio of 11.9. The FTSE 100, a price-to-earnings ratio of 10.8. The FTSE All-Share Monetary sector — containing 256 firms — is on a price-to-earnings ratio of 9.1. The FTSE All-Share Primary Supplies sector (21 firms), 6.7. The vitality sector (15 firms), 6.5.
And so forth, and so forth. America’s S&P 500? 22.8. The Dow Jones Industrial Common? 25.7.
1997, redux
Briefly, I feel we might have seen this film earlier than.
The following few months may effectively be torrid. Nevertheless it’s not going to take a large shift in sentiment for the market to show: when low-cost markets meet beneficial circumstances, sentiment flips in a short time. And elections — and adjustments of presidency — have a useful knack for delivering that change in sentiment.
And with the price-to-earnings ratios talked about above, I do know the place I’ll be wanting.
Take it from me.
