UK Markets

UK Markets Outlook

UK Markets Outlook

Markets mistaken on speed of rate hikes

Although the economic backdrop has recently become less favourable for UK asset prices, we expect that the economic recovery will regain some vigour in the second half of next year, that CPI inflation will fall close to the 2.0% target in late 2022 and that over the next two years the Bank of England won’t raise interest rates as fast or as far as investors expect. As a result, we expect 10-year gilt yields to rise from close to 0.90% now to only 1.50% by the end of 2023 and we think the FTSE 100 will climb from around 7,225 now to 8,000 by the end of 2023. Relative to our US forecasts, the rise in bond yields is smaller and the increase in equity prices is larger. That said, we are not expecting the pound to strengthen against either the dollar or the euro. In fact, the risk is that it weakens against both.

22 November 2021

UK Markets Outlook

Budget October 2021 – OBR delivers for Sunak

This Budget was perhaps more notable for what the Chancellor didn’t do rather than what he did. The OBR handed Rishi Sunak a significant upgrade to its forecasts for the public finances but, while the Chancellor spent some of the windfall a substantial amount was saved – allowing the Chancellor to start building a war chest that could be deployed ahead of the next election.

27 October 2021

UK Markets Outlook

Economy and policy to provide a bit less support

The recent downward revision to our GDP growth forecasts and the recent hawkish signs from the Bank of England which prompted us to bring forward our forecast of when monetary policy will be tightened means the economic backdrop is a bit less conducive towards rapid gains in risky assets than we previously thought. Admittedly, we still think that the economic recovery will be healthier than most forecasters expect and that the Bank of England won’t tighten policy until a year after the mid-2022 date assumed by the financial markets. As such, we still expect the FTSE 100 to gain some ground on the S&P 500 over the next couple of years. And we think that by rising only modestly from about 0.60% now to 1.25% by the end of 2023, 10-year gilt yields will increase by less than 10-year US Treasury yields.

9 August 2021
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UK Markets Outlook

BoE may unwind QE before hiking rates

We think there’s a good chance that when the Bank of England’s Monetary Policy Committee starts to tighten monetary policy it will do it by unwinding some quantitative easing before it raises interest rates. That would be consistent with the gilt yield curve steepening rather than flattening.  

22 June 2021

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

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.

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