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The first signs of Spring for the UK economy?

What a difference a week makes. From gloomy, snowy backwater, the UK is suddenly showing the first signs of Spring, with inflation down, a Brexit transition deal sorted and a small recovery in the pound. Should investors be taking heart from these green shoots?

  • Inflation is falling, wages are rising and NHS workers have been given a pay rise
  • The Brexit situation also seemed to turn an important corner, with a transition agreement reached
  • Are there contrarian opportunities in UK equities?

Philip Hammond’s claims to be feeling ‘tigger-like’ about the UK economy were greeted with some scepticism, but data since the Spring Statement has given cause for cheer. Inflation came in lower than expected, at 2.7%, while wages came in higher than expected (2.8% with bonuses). There’s more money for NHS workers and an improvement in retail sales.

The Brexit situation also seemed to turn an important corner, with an agreement whereby the UK offered concessions over sovereignty in exchange for the promise that a cliff-edge exit would be avoided. There was also a promise from the EU that the City of London would have “appropriate” market access after Brexit (with the caveat that this would be only on terms dictated by the union). FX markets were chirpy enough about the deal to send sterling higher.

If things are looking better for the UK, it could be quite the contrarian opportunity. The UK markets have underperformed their global peers by some margin - the FTSE 100 is down 3.4% over the past 12 months. That compares to a rise of 29.6% for the Hang Seng, 15.6% for the S&P, 11.0% for the Nikkei, 2.54% for the Dax. At the same time, the UK market offers a chunky yield - the FTSE 100 currently has a yield of over 4%. The only other developed market with a yield of over 3% is the Developed Europe Large Cap.

Sue Noffke, manager of the Schroder Income Growth Fund, said this week that she thought the negativity about the UK had been overdone. She said concerns on Brexit were already priced into UK markets. There has been some stabilisation in domestically focused shares and a stronger pound has helped to damp price rises and make imports more affordable.

The big unknown remains the Corbyn factor, or rather the John McDonnell factor, which is still creating a few nerves. However, the better things go on Brexit and the economy, the less likely a far-left government becomes. Perhaps there is hope yet for UK shares.


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