The flurry of positive economic indicators emerging from the UK, including stronger manufacturing and service sector numbers paint a better outlook but while a long road still lies ahead, investors could be looking at a “sweet spot” for UK equities.
Second quarter GDP growth of 0.6 per cent represents a significant step up from the previous three month figure of 0.3 per cent and while it is hardly a return to form for the UK economy it nevertheless points towards an economically stronger Britain.
The influential thinktank the National Institute of Economic & Social Research now anticipates the UK economy will expand by 1.2 per cent this year and by 1.8 per cent in 2014, up from its earlier predictions of 0.9 per cent and 1.5 per cent respectively.
The decent news-flow represents a major period of respite after years of disappointing data. Hopefully all of this can only be good for stockmarkets, says Gary Potter, co-head of multi-manager at F&C Investments.
Potter says: “There has been a lot of good news generally, indicative of the improving global economy. While we are still a way off from significantly strong economic growth, this could be a sweet spot for investors. Historically stockmarkets tend to perform better when there is an anticipation of a better economic environment.”
Despite the volatility brought on by the US Federal Reserve’s warning that the end of its massive quantitative easing programme was in sight, the UK’s benchmark index, the FTSE 100 is up some 13 per cent year-to-date, and by a similar level over the past 12 months. And the average IMA UK All Companies fund, at some 24 per cent better over the past year, has comfortably surpassed the benchmark index.
While there are no shortage of potential obstacles which could send another shock of volatility into markets, the outlook and economic indicators of a more benign environment are at least encouraging.
One pillar of support that looks set to remain in place is the environment of ultra-low interest rates in the UK. Bank of England governor Mark Carney in light of the upswing in UK economic data has followed his US counterpart by tying the future path of interest rate policy to unemployment, stating 7 per cent as the point at which he would reassess its policy.
Henderson Multi-Manager Income & Growth manager James de Bunsen says: “There were plenty of ‘ifs’ and ‘buts’ in Carney’s forward guidance but we expect interest rates to remain low for some time to come. This combined with positive economic data should be supportive for domestically-focused UK equities. However, valuations no longer look particularly compelling in mid or small caps, with both indices having significantly outperformed the FTSE 100 by a substantial margin (circa 8 per cent annualised) since the market lows of 2009.”
Overall de Bunsen remains roughly neutral as the positive news emanating from here and abroad, and lack of recent bad news emanating from potential trouble spots, compensates for the relatively full looking valuations.
It is easy to forget that not so long ago talk of a possible triple dip recession filled the airwaves. However the combination of positive readings from the Purchasing Manager Index surveys for manufacturing, construction and services has helped to quash such chatter notes Aidan Kearney, co-head of multi-manager portfolios at Aberdeen Asset Management. He adds: “Doubtless the recovery in economic growth needs to become more sustainable and entrenched.
“And the problems overhanging the UK, most notably the enormous public debt pile, will best be addressed through a growing economy, to which the support of a vibrant business community and a confident consumer, both of whom will be instrumental in generating increased tax revenues, are essential.”
However one major factor that is missing right now amidst all the good news is boardroom confidence. Potter says: “We need business to start investing again but this is a global issue. There are plenty of projects, especially infrastructure in the UK, which will create more jobs.”
De Bunsen concurs, adding: “The key question is whether this embryonic confidence can in turn lead to further investment spending and hiring. What is happening elsewhere in the world will continue to have a major bearing on what happens in the UK economy and indeed to the global earnings profile of the UK market.
“The US looks to be recovering nicely, although the imminent unwinding of the great quantitative easing experiment presents a significant risk. Problems in Europe and China also have the potential to cause corporate executives to retreat into their shells.”