The Week: The UK continues its unloved status

As Valentine’s Day approaches, the UK still can’t find many suitors. The post-election bounce has ebbed and investors are looking at the Brexit negotiations with trepidation.

  • With the far left threat out of the way, investors are looking more closely at the path ahead under the Conservatives
  • It is clear that Brexit is not ‘done’ and the UK economy isn’t out of the woods
  • The economy has seen some improvement, but not enough to suggest a long-term trend

The ‘Boris bounce’, exciting though it was, has proved all too brief. Once again, UK-focused funds are languishing behind their global peers. They have even underperformed China funds. Apparently, Brexit is worse than the Coronavirus, at least for stock markets. 

The potential for a far-left government had preoccupied markets up to the General Election. As that immediate threat dissipated, investors were forced to take a closer look at what lay ahead for the economy under the Conservatives. As it turned out, Brexit was some way from being ‘done’ and the war of words over a trade deal is now taking its toll on British assets. 

There has been somewhat better news on the economy, though it is not yet clear whether this is a response to improving global economic conditions, or idiosyncratic to the UK. The recent January services PMI reading of 52.9 would seem to suggest better times ahead for the UK economy. 

However, this has yet to be felt in tangible data. In the meantime, backward-looking data has been dire: the UK economy saw no growth in the final three months of 2019, with manufacturing contracting for the third quarter in a row and the all-important service sector also slowing. Although the economy grew by 1.4% overall in 2019, growth was concentrated in the first half of the year. 

Equally, there has been no real revival in areas such as retail, on which the UK economy is heavily reliant. The latest figures from the British Retail Consortium suggested that the urge from environmentalists to accumulate less ‘stuff’ was starting to be felt in spending habits. 

Of course this means that the UK stock market is still cheap, pretty much as cheap as it was last year before any hint of a ‘Boris bounce’. The market may yet be galvanised by M&A activity as international buyers recognise value. They may be less concerned about the ultimate outcome of the Brexit negotiations. However, it means that the UK market still lacks a catalyst. This is going to be a long year of negotiations, with plenty of big talk on both sides. It’s difficult to get very excited about UK assets as a result.