June 2024

Market Commentary

UK Economy Surprises to Upside

(3 min read)

Last month we wrote about the lack of domestic sponsorship for the UK stock market. We highlighted the wealth management industry’s departure for global strategies and pension funds having the lowest exposure in percentage terms relative to other G7 countries, which have a significantly higher weighting to their home market. We pointed out the relative and absolute attractiveness of UK equities and stated that we are quietly increasing exposure in client portfolios.

Poor narrative at a headline level following Brexit and political uncertainty has kept investors away but if we compare the UK macro data with other major economies, the UK looks either in line,  for example regarding inflation, or in a better place with UK GDP growing faster than Germany, France and Italy since 2010. UK real household disposable income is now above pre-pandemic levels, and the savings rate is running at 10%. There will be some mortgage refinancing to be considered over the next 18 months, but lower interest rates will help. Consumer and corporate balance sheets are in good shape, the strain is being taken by the government deficit and overall debt to GDP ratio but, again, the same if not worse can be highlighted for other major economies. 

The chart below plots the Citigroup Economic Surprise Index for both the UK and US. The index aggregates all economic data released and measures the result versus the consensus forecast. If the data is better than the consensus forecast that is a positive for the overall index and vice versa. What the chart illustrates is that for the UK (orange line), the index fell sharply into year-end but since February the economy has surprised significantly to upside and now resides firmly in positive territory. The opposite is true for the US economy (white line) which, having avoided a recession so far much against the mainstream view, is now surprising to the downside. 

We are now in the run up to a change of government in the UK, with an election on 4th July. If polls are correct a strong working Labour majority is expected. Large UK corporations, including the City, have discounted this result which will end an administration that caused polarisation of views following Brexit. A new era of political stability should see a rerating of UK assets which, in our view, are wildly out of kilter with overseas markets. We continue to favour the UK and expect to add exposure.

* Source: Bloomberg showing Citigroup Economic Surprise Indices: UK (orange line) / US (white line)

Peter Geikie-Cobb | Head of Investment Research
Montgomery Associates
June 2024