Andy Raikes

Market Outlook

UK Outlook


Latest UK economic and market outlook. 


We remain reasonably balanced in terms of outlook and portfolio positioning. While the macro backdrop has been subdued for some time – particularly in the UK and Europe – as the world adjusts to higher levels of interest rates, it is clear that economies thus far have proved to be more resilient than many feared. This has been most evident in the US, where economic growth has continued to be very robust. However, inflation has continued to ease, and while expectations of how quickly US rates will be cut have moderated due to ongoing economic strength, we are still in an environment where major central banks will be cutting rates later this year. That in turn will reduce the pressure on consumers and businesses, and reduce the risk of a more severe and protracted downturn. Indeed, certain forward-looking indicators in the UK and Europe have started to improve in recent months, and attention is beginning to turn to recovery in the second half of this year and into 2025.

Whilst markets have clearly rallied from the lows in October last year, particularly the US, valuations in much of the UK and Europe still remain very depressed. Furthermore, while we are cognisant of geopolitical risks, the backdrop of reasonably resilient growth and falling inflation suggests that markets are likely to remain well supported. Although some near-term consolidation in markets would not be surprising after a strong run, we do not see a catalyst for a substantial correction, absent a negative exogenous event.

As alluded to above, we have continued to run the portfolio in a balanced way, with a beta currently just below 1.0. That said, over the course of the year we have added to areas of cyclicality, as well as mid-cap exposure. Mid-caps in the UK, as in other markets, continue to look extremely attractive after a period of significant underperformance, which has left valuations in many smaller companies at compelling levels in our view. Indeed, UK mid-caps are trading at more than one standard deviation ‘cheap’ versus a wider UK market that is itself trading at the biggest discount to global equities in over 30 years, on a sector-neutral basis. A significant driver of mid-cap underperformance has been the combination of a weak macro backdrop coupled with rising bond yields. The underperformance of mid-caps versus large-caps is closely correlated with rising bond yields, and it is notable that mid-caps stopped underperforming when the US 10-year yield peaked in October last year. From here we believe the backdrop of more stable bond yields and falling short-term interest rates should not only improve risk appetite and therefore accelerate a mid-cap re-rating, but also boost M&A as the cost of capital comes down. In fact, we have already started to see this. The prospect of improving leading indicators for the UK and European economies should also be supportive for mid-caps, which over-index to more cyclical companies, both domestic and international.  These companies will be key beneficiaries of any improvement in economic growth into next year. We believe this confluence of factors provides a very attractive alpha opportunity in the mid-cap space. Crucially, it is not just in cyclical mid-caps where we find compelling valuations; we have also seen a similar de-rating in many more defensive mid-cap names, and we are pro-actively taking advantage of these opportunities across a range of sectors.

From a sector perspective, we remain overweight Industrials, with a mix of defensive growth, including Defence, and more cyclical sub-sectors such as Construction, with a skew to infrastructure and Paper & Packaging. Another overweight is Consumer Discretionary, spanning a range of sub-sectors from Travel & Leisure to UK domestic recovery names, as well as more defensive growth names. We are also overweight Healthcare, which we see as very attractively valued at present. Recently we have moved overweight the Mining sector, increasing exposure to both gold and base metals, where the free cash flow yields are extremely attractive in our view, at a time when commodity prices are inflecting more positively. Finally, we continue to have an overweight in Consumer Staples, but skewed to mid-cap names for the reasons discussed above.

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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