Richard Bullas, Co-Head, UK Equities at Martin Currie (part of Franklin Templeton), proposes 10 reasons why investors should turn their attention to and invest in UK equities.
We are increasingly optimistic on the UK economy. Over the last year we’ve talked extensively about our positivity for a UK domestic resurgence. We put our hands up to say that we were early in our optimism, with the recovery derailed in the second half of 2024 following the change of government and its accompanying budget. However, from where we stand now, there is growing confidence for many domestically focused small and mid-cap (SMid) companies.
1. Recent economic data has been surprising on the upside: UK economic momentum has picked up, with economic growth and retail sales recently beating expectations.
2. Falling Inflation: There is a disinflationary wave to come once near-term utility bills ease. Forecasts show inflation getting to the 2% target in early 2026.
3. Energy costs falling: Energy prices will be a major driver of inflation coming back to target. UK gas prices are down 40% from February highs, and the oil price is down 14% year to date.
4. Interest rates cuts: Markets are pricing more interest rate cuts; with the expectation the UK base rate will be down to 3.5% in a year’s time. We think this could go even further, as disinflationary pressures build.
5. Housing/Mortgages: Regulation is easing and shorter-term gilt yields and swap rates are falling. This is a big positive for the UK housing market and with current mortgage rates falling, this has wider positive impacts across the economy.
6. Solid UK Consumer: Savings rates at 12% are elevated compared to long term norms. Maybe the Bank of England cutting interest rates will release the brake. Consumer credit is at a 30-year low as a percentage of incomes, there is near record high employment, and we have almost two years of real wage growth at 1.5–2.0%.
7. Sterling: US Dollar weakness and pound strength is disinflationary. A positive for domestic companies, it’s also a headwind for international companies translating into profits and cash.
8. Tariffs & Trade: The UK is relatively well insulated given a small goods trading deficit. Furthermore, we have secured the first post ‘Liberation Day’ trade deal announcement with the US as well as India and Europe.
9. Capital Flow: There are early signs of capital flowing out of the US and into Europe, and with UK valuations looking relatively attractive to other markets, we believe the UK could be a beneficiary.
10. Valuations: Even after the recent turmoil, the UK market is trading at a 40% discount to the S&P. UK small and mid companies are trading on historically low valuation multiples and attractive dividend yields.
All the above lead us to believe that the prospects for UK small and mid-companies are improving. Recent updates from many domestic companies highlight the improving trading conditions, and we’ve seen a recent divergence in performance from large to mid-cap stocks.
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