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Andy Raikes

Market Outlook

UK Outlook

Outlook
14 October 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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The most significant events in markets over recent weeks have been policy easing in the US and China. In the US, against a backdrop of slowing economic data and with 3-month rolling underlying inflation already below the Central Bank’s 2% target, the Fed decided to cut by 50bps. This was clearly welcomed by equity markets as it increases the likelihood of a soft landing in the world’s largest economy, with additional comfort taken from the fact that the Fed has substantial scope to cut much further, if necessary. Importantly, rate cuts should be effective because consumer balance sheets are in reasonably good health across the developed world.

While the direction of the Fed’s decision was well-telegraphed, policy easing in China caught investors by surprise and catalysed a major relief rally in China itself, as well as China-sensitive sectors in other markets. Key announcements include: cutting the Reserve Requirement Ratio to inject RMB 1 trillion of liquidity into the system; lowering outstanding mortgage rates to ease the mortgage burden for c.150m people; reducing downpayments for second homes; setting up a new swap facility to allow asset managers and insurers to tap at least RMB 500 billion of PBOC liquidity to purchase equities; and providing a further RMB 300 billion of funds to allow banks to lend to corporates for share buybacks. At the time of writing, there is speculation that these measures will be followed up with a series of fiscal announcements, including cash handouts, and issuing RMB 2 trillion via special bonds to stimulate consumption and help local governments tackle debt problems.

Closer to home, the Bank of England also cut rates during the quarter. Although the quantum was less than in the US at a more modest 25bps, here too there is an expectation of further cuts to come, with the market pricing in another c.100bps off UK rates over the next 12 months.

Against this backdrop, we remain constructive on the outlook for UK equities, where valuations continue to be depressed in many areas of the market, particularly mid-cap stocks. Of course, we are not complacent and there are risks on the horizon that need to be navigated in the coming months. Clearly tensions are rising in the Middle East, with an associated rise in the oil price. If the situation deteriorates further, this could result in downside to equity markets. Meanwhile the US election in November, whilst not directly relevant to UK equities, could be a source of volatility for global equities generally. Here in the UK, the forthcoming budget at the end of October will be closely scrutinised and will likely contain some incremental headwinds for both corporates and consumers in the UK, given the need to raise funding. That said, the fact that there will be tax rises has been very well covered in the media, and getting the budget in the rear-view mirror will be helpful in our view as it will bring much needed clarity, and potentially some relief.

With this in mind, we continue to run a relatively balanced portfolio, with a beta of around 1 and a skew towards mid-caps. We continued to add to our mid-cap exposure during the quarter, as indeed we have been doing for some time.

Our main sector exposures have not changed materially over the quarter. The major overweights continue to be Industrials (including construction/housing related companies such as Balfour Beatty, Breedon and Grafton, as well as less cyclical defence companies such as Chemring and BAE Systems and business services such as Experian, Serco & DCC), and Consumer Discretionary (including Marks & Spencer, Watches of Switzerland and Howden, as well as Travel and Leisure names such as Whitbread, Dalata and Jet2). Conversely, the main underweights are Financials, as well as Oil and Gas, and to a lesser degree Healthcare.

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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