The newest GDP figures, for the fourth quarter of 2023, informed 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 an entire — and never the ultimate six months — the economic system truly grew by 0.1%.
However annual progress 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 manner, although, the purpose is that prime minister Rishi Sunak’s promise of financial progress isn’t being met. We’re simply flatlining, primarily.
What we’d like is a feelgood issue
Just a few weeks again, I actually wasn’t positive 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, seemed extra enticing.
My argument then was any financial stimulus would occur the opposite facet 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 positive. Don’t get me flawed: America remains to be enticing. 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 may come to an finish.
Put one other manner, commentators are speaking up the similarities between now and 1997, when Labour beneath Tony Blair gained the final election. And sure, the 2 elections are certainly comparable
However suppose again to what occurred after the election — a pointy enhance in feelgood issue, as folks noticed a authorities emboldened to behave. Consider Gordon Brown’s determination to make the Financial institution of England unbiased, as an illustration, liberating it from political interference when it got here to setting rates of interest.
Growth instances over the Atlantic
Traders have hardly been passionate about 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 The Funding Affiliation has been reporting web outflows from UK fairness funds, with the withdrawn money being reinvested in fixed-income funds and short-term cash market funds.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 tough to determine. Have a look at the FTSE 100’s five-year efficiency: over 5 years, it’s up simply 6.8%. To avoid wasting you doing the maths, that’s an annual compound progress fee 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 progress fee of 15.9%.
And once more, to avoid wasting you doing the maths, that implies 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 mounted revenue funds: they want quarter-on-quarter progress charges to report back to their traders.
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 is not going to persist endlessly. And albeit, it’s tough to think about {that a} change of presidency may make issues truly 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 bought extra than simply hope to depend on. The information — and one reality particularly — go in traders’ favour as effectively.
The UK inventory market is affordable. 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 corporations — is on a price-to-earnings ratio of 9.1. The FTSE All-Share Fundamental Supplies sector (21 corporations), 6.7. The vitality sector (15 corporations), 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 believe we might have seen this film earlier than.
The subsequent few months might 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 situations, sentiment flips in a short time. And elections — and modifications of presidency — have a helpful 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 trying.
Take it from me.
