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.
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