Column: The UK economy is preparing for a dark winter and beyond

Commuters walk on London Bridge in warm weather on June 17, 2022 in London, England. REUTERS/Henry Nicholls

LONDON (Reuters) – As extraordinary as the storm brewing in Britain’s economy may seem, the UK market has yet to fully reflect it.

It’s been a generally poor year for most major markets, and against the backdrop of spectacular inflation and recession forecasts, UK assets are holding up better than you might think.

With an enviable record of becoming the first G7 economies to see inflation surpass 10% amid the current global price spike, the Bank of England is forecasting interest rates to peak above 13% this fall, followed by 2018. Predicting the longest recession since 2019 has already taken everyone by surprise. The global financial crisis 14 years ago.

The country is still in a leadership hiatus and won’t have a new prime minister until next month.Successor candidate Liz Truss has promised tax cuts worth around £30bn, but that will be cut next year to curb inflation. It only puts pressure on the BoE to double interest rates to 0.5 percentage points, weakening by 0.5 percentage points. Expected uptick in GDP from tax movements.

The multiple hits from volatility in household energy prices over the next six months, sharp cuts in real wages and higher borrowing costs are all demand demand flagged by the BoE after this summer’s drought and political vacuum. indicates a long-term freezing of

Susannah Streeter of Hargreaves Lansdowne said this week that “a raging summer of inflation has set the way for a rather dismal fall and disastrous winter as households grapple with this wave of inflation. there are,” he said.

The whole thing sounds very apocalyptic – and that’s before you read the British press.

Perhaps the market saw this coming?

Yes, No.

The British pound has fallen more than 10% against the rampant dollar so far this year, UK government bond funds have fallen at least as much, and domestic UK mid-cap stocks (.FTMC) are down about 10% in dollar terms. Down 25%, even the Eurozone is underperforming. blue chip.

Still, this photo isn’t entirely exceptional – at least not yet.

no plan

The FTSE100 Index has been pleased with the weaker sterling and significant weightings in UK-listed commodities and cyclical or ‘value’ stocks such as big oil, miners and banks, and has actually outperformed many of its peers. doing.

The dollar loss so far this year is just 9%, beating the global indices of the S&P500, Japan’s Nikkei 225, Eurozone’s Stoxx600 and MSCI.

The pound feels hot, but slightly higher than the euro and much lower than the Japanese yen – this is evident with the Bank of Japan being one of the few major central banks not to tighten financial regulations this year. The pound’s speculative position is still net negative, but well below the May low.

A net 15% of all funds were underweight UK equities in August, according to Bank of America’s global fund survey, the largest one-month allocation decline among all major regions, followed by Japan, Emerging markets, which is more negative than the positioning in the United States. Investors are overweight.

Yet UK underweight was still well below the 34% negative position in broader European equities.

Again, the big offset for many asset managers is the sectoral mix of UK equity indices and especially the FTSE100. Neglected so-called “value” stocks, such as banks profiting from rising interest rates and commodity-rich oil and mining industries, are getting bigger. Businesses are being pushed by geopolitical shocks and supply chain pressures.

Stephane Monier, chief investment officer at Lombard Odier, explains why his firm has been overweight UK stocks since early last year. “It had nothing to do with expectations for the long-term performance of the UK economy,” he said.

But he thinks that may change now.

“At this stage, I am more cautious about the UK. It is a long-term rethinking of the direction of It could be done in the coming weeks or months.

Monnier said that beyond the relative ups and downs of inflation, growth and interest rates in the coming months, what worries him most is the offsetting loss to Britain’s trade and competitiveness from Brexit. said the lack of a coherent political plan to Geopolitics dictate a more open world and potential deglobalisation.

“Regardless of the benefits of Brexit, we need to have a really good plan to make up for what we lost with Brexit, and I don’t see that plan.”

The author is the Finance and Markets Editor at Reuters News.All views expressed here are his own

Mike Dolan on Twitter: @reutersMikeD Editing: Gareth Jones

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