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.
Paul Dales Chief UK Economist
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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 Chart Book

Rapid economic recovery to support equities

Our view that the economy’s recovery from the COVID-19 crisis will be faster and fuller than most expect is consistent with UK equity prices continuing to rise over the next couple of years. Admittedly, UK equities have lagged their international counterparts since the pandemic. The FTSE 250 only rose back to its pre-pandemic level earlier this month and the FTSE 100 is still 9% below it. But the composition of the UK’s equity indices means that they should benefit by more than others from the economic recovery. As such, the gap between UK and international equities may narrow over the next couple of years.

22 April 2021

UK Markets Chart Book

Pricing in higher inflation and interest rates

The jump in 10-year gilt yields from 0.29% at the end of January to 0.76% now has been driven by the markets pricing in a rise in inflation after the pandemic that they think will eventually prompt the Bank of England to raise interest rates sharply. With the Bank having done a fairly good job of anchoring short yields, the yield curve has steepened. We think this trend has further to run. Admittedly, we are not convinced that the Bank will end up raising interest rates sharply. But we do think that inflation will be persistently above 2% from 2023, if not before. As such, we have revised up our 10-year yield forecasts to 1.25% by the end of this year and to 1.50% by the end of next year.

24 March 2021

More from Paul Dales

UK Data Response

Consumer Prices (May)

With businesses having raised their prices by more than we expected once they reopened after COVID-19 lockdowns ended, we now think CPI inflation will rise to a peak of 2.9% later this year compared to 2.6% previously. And the further surge in costs earlier in the price pipeline has made us a bit less confident that CPI inflation will drop back below 2.0% next year.

16 June 2021

UK Economics Update

Four-week delay to Freedom Day not a big blow to the economy

A four-week delay to the easing of the final domestic COVID-19 restrictions beyond 21st June is unlikely to prevent the economy from climbing back to its pre-pandemic size by the autumn. And although there is a clear risk that “Freedom Day” will be delayed again, as long as any further delays can be measured in weeks rather than months COVID-19 probably won’t leave a big scar on the size of the economy.

14 June 2021

UK Economics Chart Book

Inflation risks rising

The risks to our forecast that CPI inflation will rise from 1.5% in April to a peak of 2.6% in November before dropping back in 2022 are increasingly on the upside. Rises in shipping costs and global agricultural commodity prices as well as shortages of semiconductors and labour could all conspire to push CPI inflation higher this year and keep it above 2% next year. At the moment, though, we think that the lingering effects of last year’s collapse in output will prompt many firms to absorb the bulk of higher costs in their margins and to limit pay rather than pass them on to consumers via much higher prices. This “spare capacity” effect explains why we think core inflation will stay below 2% until late in 2023.

10 June 2021
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