It’s been a big week of data for the UK economy. Does it move the dial on UK equities?
- GDP growth and wages data were higher than expectations
- The UK consumer is in robust shape, with savings levels high
- Buybacks and M&A activity continue to support market prices
One of the key questions for the year ahead is whether the UK stock market can revive. The arguments are well-rehearsed: valuations are cheap, negativity is overdone, M&A and buybacks continue to support the market, but the UK is still struggled to lure back investors. What might revive appetite for UK equities this year?
A better performance from the UK economy would certainly be a draw. While many UK companies are not particularly dependent on the domestic economy, it provides a boost to sentiment particularly for smaller and mid-cap stocks.
There are signs that this could happen, with GDP figures coming in ahead of expectations. Equally, higher-than-expected wages data could support consumer spending. The UK consumer is in robust shape, with savings levels at their highest non-pandemic levels since 2015. This compares favourably to the US consumer where savings levels are low, and credit card debt is vast.
The thorn in the UK’s side may be inflation, which ticked up to 3% last month, and is forecast to hit almost 4% by the middle of the year. Gilt prices have been relatively stable, but if they start to tick higher and expectations dim of further rate cuts, this would be a concern.
Buybacks and M&A activity continue to support market prices. M&A is a double-edged sword, because many fund managers believe companies are being taken out at too low prices, even if it is a significant premium to the existing price. It also diminishes the opportunity set available for UK fund managers, at a time when the UK IPO market remains anaemic. However, it has helped lift share prices over the past year and could still be a catalyst for change in the UK market.
Perhaps the key catalyst, however, would be a weakening of the megacap technology trade. The recent wobble for Nvidia, saw it drop $600bn of its market capitalisation in a single day. If that capital were redeployed to the UK market, it could buy the UK’s largest company – AstraZeneca – around 2.5x over. The dominance of the US mega-caps has sucked capital from markets across the globe, and any re-allocation would be beneficial.
Most fund managers believe that if the UK market started to turn, it could turn very quickly. Sentiment is so depressed, and expectations so low, that it would only take the smallest shift to make a significant impact on market pricing. After a long run of weakness, the UK is due some more attention from investors.
