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Andy Raikes

Market Outlook

UK Outlook

Outlook
12 July 2024

By

Co-Portfolio Manager, TT Environmental Solutions Strategy; Portfolio Manager, TT UK Equity Strategy

Latest UK economic and market outlook. 

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Positioning remains relatively balanced, with the beta having edged up since the beginning of the year to its current level of around 1.0. This reflects our view that the outlook is improving as macro indicators in the UK continue to pick up, particularly in the depressed manufacturing space. Although there has been a slight hiatus in terms of activity into the election, we ultimately believe that the change of government will be a positive catalyst for the economy, since the country was clearly unhappy with the previous administration, as evidenced by the collapse in the number of Conservative seats. As a relatively centre-left government, we do not expect any extremely radical policy changes. Meanwhile, although expectations for the pace of rate cuts have been pushed out, we still expect interest rates to fall over time. The combination of political clarity, eventually falling rates and the continued recovery in consumer confidence makes us reasonably constructive on the domestic UK economy. For this reason we have continued to increase our exposure to mid-cap companies, the performance of which often correlates with the economy to a greater degree than for large-caps. There may also be scope for a rerating of the UK market as a whole as risk premia fall. Indeed, the UK’s centre-left government and its large majority could mean that the UK market begins to be seen as a potential safe haven, given growing political risks in both Europe and the US.

In light of our constructive view, we have added to Industrials, the UK consumer and housing. In Industrials we added to Serco, Balfour Beatty, Renewi and Chemring. Within the consumer area we already owned the likes of Howdens, but also bought M&S and Deliveroo, and added to Watches of Switzerland. The Labour government made a firm manifesto pledge to increase new build housing, while the secondary housing market is at a low ebb, and looks set to pick up as interest rates come down. With this in mind, we added to Grafton and bought a new position in Breedon, both of which have exposure to the UK housing market.

We also added to Mining over the course of Q2, principally through Glencore, where the valuation looks very attractive in the context of the sector. Importantly, one of the issues that has been an overhang for Glencore has been awaiting the completion of the Teck Resources coking coal acquisition. This has now completed in the first week of Q3, and therefore the focus should move on to the very cheap valuation and the prospect of returning excess capital to shareholders. Here the story is improving as it now looks less likely that Glencore will demerge its coal business, meaning it should be able to return more cash to shareholders. We also like the fact that Glencore does not have any exposure to iron ore, where we continue to be cautious.

Whilst we expect the government change to be a positive catalyst for the market generally, we must also acknowledge that public finances are tight, and therefore certain sectors may be in the crosshairs for potential tax raids. We do not believe the portfolio is particularly exposed to this risk, but we will continue to be vigilant about where the risks might lie, taking action accordingly, as we already have done in reducing Flutter.

Important Information:

Nothing in this document constitutes or should be treated as investment advice or an offer to buy or sell any security or other investment. TT is authorised and regulated in the United Kingdom by the Financial Conduct Authority (FCA).

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