2024年英國展望：暴風雨結束的跡象

We are entering a new post-COVID regime. Elevated interest rates and inflation (as in above recent historic lows) are likely to mute/temper the effect of stock market returns. We expect central banks to focus on containing inflation in the domestic economies rather than rapidly cutting rates to boost growth.

Stock selection is increasingly important to an overall return profile, and we believe the opportunities for skilled, high-conviction managers to add active returns will significantly outweigh the opportunity for market returns.

Turbulent times

A quick look in the rear-view mirror shows that the detritus of recent times isn’t far behind us. As a nation we’ve experienced significant turbulence; a divisive split from the European Union, rocked capital markets with the short-lived “Trussonomics” administration, a cost-of-living crisis, industrial unrest at multi-decade highs, and a well-publicized and controversial North/South High Speed 2 (HS2) railway network that still appears just out of reach.

The abandonment of HS2 is estimated to save the government £36 billion, and with tax revenues forecast to rise to just shy of 38% of gross domestic product (GDP) by 2028,¹ could a dose of fiscal stimulus be on the cards to ignite the UK’s growth engine? Probably not. Pro-growth measures during a period of high inflation will undoubtedly pique the interest of the Bank of England’s Monetary Policy Committee (MPC), and a push/pull between fiscal and monetary policy will not help the credibility of an increasingly ill-favoured conservative government, in our view.

With a general election looming and a shift in power looking ever-more likely, Labour Party Leader Sir Keir Starmer has already committed to not raising income taxes or value-added tax (VAT). But, with the general public encouraging investment in public services, and parliament still haunted by the ramifications of unfunded spending some 12 months ago, something has to give. As the UK Consumer Price Index (CPI) falls and base rates looked to have peaked in this cycle, there may be some comfort for UK-based corporates and consumers alike, that the nadir of the squeeze is behind us.

No plain sailing

There is no denying that challenges lie ahead. Interest rates are higher than they have been in decades. The full effect on the consumer is likely to drip through in the coming years as fixed rate mortgages refinance. And economic signals are frequently diverging both domestically and overseas too; this is particularly relevant to the swathes of the UK market generating international earnings.

Geopolitically, we keep a close eye on the tragedies unfolding in the Middle East. Humanitarian welfare remains a priority. Although trivial in comparison, knock-on impacts will undoubtedly occur. An escalation of the Israel/Hamas war into Iran, Lebanon, or involving the United States could result in a supply driven oil price rally to around US$150/bbl.² This could lead to a period of supernormal profits for UK-listed oil majors, but we believe the impact on consumer budgets and corporate expenses could be profound.

Until now, the decline in market interest rates has moderated the impact of government debt on interest payments. This looks set to change. Chancellor Jeremy Hunt recently warned that the government needs to locate an extra £23 billion to service its debt compared with March 2023, due to the recent gilt selloff. Forecasters predict that this could mean the United Kingdom will allocate 3% of GDP solely to paying its outstanding debt obligations over the coming years, versus 1% two years ago.³ UK valuations are already well below their long-term average, and this is compounded as one descends the capitalization spectrum. To illustrate, the FTSE Small Cap (ex-losses) now yields a premium to the FTSE 250 (ex-losses), which itself delivers a premium versus the FTSE 100.⁴ Many of these businesses are in sound financial positions, so when stable dividends meet irrational selling pressure, mathematical oddities can occur, leaving investors feeling all at sea.

Is the tide turning?

Considering our base-case environment where rates are higher for longer, supportive statistics do exist—corporate debt and deposits as a percentage of GDP remain historically attractive, and as quality-focussed managers, this only broadens the universe that we are able to search in. By navigating portfolio construction in a core, style-agnostic manner, we seek to mitigate extreme style risk—high-growth portfolios are set to encounter challenges in an extended period of elevated interest rates.

The opportunity that lower valuations present is extreme, in our view, enabling both income and growth to thrive. Dividends are such an important and integral component of UK total, returns. And we remain of the view that companies in quality financial positions have the potential to outperform given the propensity to weather choppy market environments while continuing to return capital to shareholders. We think that areas such as tobacco, oil and gas, pharmaceuticals and miners are all set to benefit from this trend, particularly in a risk-off environment, which bodes well for the UK blue-chip index.

Reasons to be cheerful

We view stable-dovish policy as a key catalyst that could spark a rebound in the recently observed small- and mid-cap underperformance, particularly as these businesses have generally gone on to materially outperform in the immediate periods following a peak in interest rates. With UK small- and mid-cap earnings forecast to grow by over 22% in 20242, the prospects of upgrades and re-ratings are increasingly considered. Areas such as the housebuilders have fared very well in 2023 despite the hawkish rhetoric—now with a dovish tailwind. The outlook is bright, and we believe there is scope for potential continued outperformance through 2024.