Despite widespread pessimism about the UK economy, the stock market is quietly delivering one of its best performances in decades, according to analysis from Rathbones Asset Management.
“There seems to be a striking disconnect between the ‘bad vibes’ dominating the economic narrative and the robust gains for UK equities,” says Alexandra Jackson, fund manager of the Rathbone UK Opportunities Fund.
While headlines focus on ballooning government borrowing, stubbornly high bond yields and sluggish growth, the FTSE All-Share has surged nearly 17 per cent so far this year to the end of September, one of its strongest runs in three decades. Overseas buyers, particularly US investors, have been drawn in by depressed valuations and a weaker pound, with dollar-based returns up almost 25 per cent.
Jackson argues this divergence is no accident. She says: “Financial markets are forward-looking by nature. With so much focus on the negatives, there’s every chance that the UK will surprise on the upside. There are fantastic UK companies trading at extremely low valuations for little reason.”
With the US Federal Reserve widely expected to cut interest rates in the coming months to support the American economy, global growth could continue to tick over. S&P Global revised up its 2025 global GDP forecasts on the back of strong second-quarter data.
Jackson says while growth has slowed in the UK after the widespread US tariffs were announced in April, economic strength appears to have ebbed everywhere, including in the US where jobs growth has fallen off a cliff. It’s notable that no country has been able to match the UK’s 10% tariff level, leaving Britain in a strong position to weather this trade war.
“If growth holds up and the UK’s Office for Budget Responsibility doesn’t need to downgrade its economic forecasts as much as feared then it could mean fewer nasty surprises in the form of higher taxes,” she says. “UK inflation has broken upwards recently, but if that starts to ease again it should make it much easier for the Bank of England to cut rates to boost the economy.”
The UK’s perceived weaknesses may in fact be its strength. Low price-to-earnings multiples, a rich mix of global earnings and an economy that has faced up to fiscal challenges head-on have made Britain look like an undervalued frontier in investors’ eyes.
“Risks remain, particularly from public finances and inflation surprises, but we believe much of the gloom is already priced in. A modest improvement in confidence, whether through fiscal policy, earnings or broader sentiment, could prove enough to extend the current momentum.
“Investors have grown used to overlooking the UK,” Jackson adds. “But that may be precisely why the opportunity now is so compelling.”
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