UK Markets

UK Markets Outlook

UK Markets Outlook

Markets mistaken on when and how BoE will tighten

Our forecasts that the Bank of England won’t tighten monetary policy until much later than the markets expect and that when it does it will unwind some QE first (perhaps in 2024) before raising interest rates (perhaps in 2025) is consistent with the gilt yield curve steepening over the next couple of years. So while 2-year gilt yields will probably remain very low for a couple more years yet, 10-year yields may rise from 0.86% now to around 1.50% by the end of 2022. We suspect that the resulting drag on the future value of UK corporate earnings will be more than offset by the boost to earnings from a faster and fuller economic recovery than is widely expected. And given that the valuation of UK equities still appears attractive, there is scope for UK equities to rise more rapidly than equities in other major markets. Our forecast is that the FTSE 100 climbs from 7,000 now to around 8,250 by the end of 2022.

24 May 2021

UK Markets Outlook

Budget 2021 – Filling the fiscal hole

While most governments are focussed squarely on maintaining or increasing fiscal support for their economies, in today’s Budget the Chancellor, Rishi Sunak, adopted a different two-staged plan for the UK – spend big for the next two years and tax big for the following three. With the bulk of the tax hikes not kicking in until the economy will be much stronger in 2023/24, this shouldn’t derail the economic recovery. In fact, if our forecast that the recovery will be faster and fuller than the OBR expects is right, the Chancellor may be in a position to cancel or reverse some of the tax hikes before the 2024 general election.

3 March 2021

UK Markets Outlook

Shaking off the underperformance

UK assets are well placed to shake off their underperformance since the 2016 Brexit vote by outperforming global assets over the next couple of years. All risky assets will continue to be buoyed by the combination of a rapid global economic recovery from the COVID-19 crisis and global central banks running ultra-loose policy for many more years. But the UK’s more favourable valuations and its greater exposure to the sectors that are likely to benefit most from the recovery, such as consumer-facing, energy and financial, suggests that equities in the UK will rebound more rapidly than elsewhere. And a further improvement in global risk sentiment and a relative rise in UK interest rate expectations may mean the pound continues to strengthen, perhaps from $1.39 (€1.15) now to $1.45 (€1.16) this year. That would take the dollar/pound rate back to within a whisker of the level seen before the 2016 Brexit vote.

15 February 2021
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UK Markets Outlook

Vaccines allow UK assets to catch up

After having been hit particularly hard during the COVID-19 crisis, UK assets are well placed to perform much better now that COVID-19 vaccines are brightening the economic outlook. Indeed, the combination of a decent economic recovery and continued ultra-loose monetary and fiscal policy should be a potent mix for both the FTSE 100 and the pound. We think the FTSE 100 could climb by about 18% from now to 7,500 by the end of next year despite the pound appreciating from $1.34 now to around $1.40. The stronger economic outlook may well push up 10-year gilt yields from 0.30% now. But as we think the Bank of England won’t raise Bank Rate above 0.10% for five years or so, 10-year yields may not rise above 0.50%.   Webinar Invite: Global State of Play Wednesday, 25 November Led by Group Chief Economist Neil Shearing, our senior economists will be holding a briefing on the health of the global economy, including an assessment of current lockdowns, the potential impact of vaccines, and what this all means for financial markets. Complimentary registration here.

UK Markets Outlook

Brexit – deal or no deal is not the big issue

As the differences between a Brexit deal and a no deal are not as big as they once were, the economic costs of a no deal have diminished. The bigger risk is that relations between the UK and the EU deteriorate to such an extent that both sides start to unravel the agreements already put in place. So what really matters now is not whether there is a deal or a no deal, but what type of no deal it is.

UK Markets Outlook

Time to shine

UK assets may outperform overseas assets over the next year or two even though the UK’s economic recovery from the coronavirus crisis may take longer. We think that a larger expansion in the Bank of England’s quantitative easing (QE) programme than the markets expect will contribute to 10-year gilt yields declining from 0.22% now to 0.15% by the end of the year. And as we doubt the Bank will raise interest rates above 0.10% for five years, gilt yields will stay at record lows for many years. Meanwhile, the sectoral make-up of the FTSE 100 and the sensitivity of the pound to global risk sentiment suggests that both will outperform as the global economy continues to recover. And if some sort of Brexit deal is agreed by the end of the year, then UK equities will get an extra boost and the pound may climb from $1.31 to $1.35. Of course, if there is a major second wave of the virus or a no deal Brexit then UK assets will underperform.

13 August 2020

UK Markets Outlook

Policy to anchor gilt yields and to buoy equities

As a protracted economic recovery from the coronavirus crisis will force the Bank of England to keep interest rates close to zero and further expand its quantitative easing programme, gilt yields will probably stay very low for many years. And although UK equity prices are unlikely to return to their previous highs soon, the prospect of economic recovery and exceptional policy support should allow them to continue to reverse their previous declines. UK equities may even outperform those in the US. The big threat to risky assets, though, is a second wave of the virus. And something like a no deal Brexit at the end of this year could hold back the recoveries in UK equities and the pound.

UK Markets Outlook

Markets may be caught out on interest rates

We think the financial markets will be caught out this year by a decent acceleration in the quarterly rate of GDP growth preventing interest rates from being cut below 0.75%. And if we are right to assume that the UK and the EU will reach a fudge or compromise to prevent a major change in their relationship at the end of the year, then interest rates may even be raised to 1.00% next year. That’s why we think gilt yields will rise from 0.60% now to 1.25% by the end of next year, the pound will climb from $1.30 to $1.40 and UK equity prices will outperform their international peers.

12 February 2020
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