As we approach an expected change of government, Martin Currie’s chief investment office Michael Browne has provided a fresh outlook for UK equities.
He said the UK’s economic backdrop is suggesting ‘this could be 1997 again’. This was the last time a long-serving Conservative government ran out of road and was met with a Labour landslide victory.
“Real wage growth and full employment has overturned a negative outlook and seen the UK economy grow, but the Purchasing Manager Index growth (PMI) actually suggests broader-based growth,” Browne said in the commentary note.
“Post election, any incoming government will be fiscally neutral, reassuring bond markets. Certainty for corporate and consumers backed by interest rate cuts should support solid economic growth over next 12 months.”
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Browne added the UK economy progressed as expected in the first half of 2024, with real wage growth and continuing full employment. “But the reality is that the recovery has been broader than that: as the PMI data shows, the UK is the only country in Europe which has a positive outlook in services, manufacturing and construction and it is striking,” he said.
Turning to what will happen in the second half of the year after the election, Browne said he expects the incoming government to alter the balance of taxes, with windfall taxes on energy and utility companies, but the overall position is likely to be fiscally neutral. This will reassure the bond markets.
The certainty given to both corporates and consumers will add confidence to the recovery and, backed by interest rate cuts, the next 12 months should show solid growth, but not exceeding 2%, he said.
“The key will be inflation,” Browne continued. “The accelerant of inflation is energy and the transmission mechanism to the consumer is food and fuel. Unless there is a major new conflict, energy prices ought to continue to stabilise and thus the secondary effects should as well. This will lead to a more benign inflation picture in 2025 and pave the way for further rate cuts.”
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He also pointed to the likelihood of a stronger pound being supportive of UK assets. Browne described Sterling’s increasing strength as potentially a ‘once-in-a-generation event’.
“We’ve been here before in 1997 when currency strength and falling gilt yield supported a positive outlook for UK equities,” he said.
“It is worth recognising that the international perception of the UK is changing,” Browne added. “A change of government, to one more moderate and international in tone, coupled with a deterioration of the European political stability, notably in France, indicates that there remains room for sterling to appreciate. This would be beneficial for lowering inflation rates even further.
“Should the Bank of England’s Monetary Policy Committee (MPC) be slow to cut rates in the second half of 2024, while the European Central Bank is doing the opposite, then the chance rises for sterling to further appreciate,” he continued. “At the same time, a reduction in the risk premium for UK assets could accelerate sterling’s move and positively surprise the equity market.”
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