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Column: Preparing for the dark winter of the UK economy and beyond

Commuters walk across London Bridge during warm weather in London, Britain, June 17, 2022. REUTERS/Henry Nicholls

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LONDON, Aug 19 (Reuters) – If Britain’s brewing economic storm looks like a runaway, UK markets have yet to fully reflect it – but investors could still balk ahead of the oncoming winter.

Against a backdrop of a generally poor year for most major markets and stunning inflation and recession forecasts, UK assets have held up better than you might think.

With the unenviable record of becoming the first G7 economy to post inflation above 10% amid current global inflation, the Bank of England has already spooked everyone by forecasting a peak in rates of over 13% for this autumn forecast, followed by the longest recession since the global financial crisis 14 years ago.

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The country is still on a leadership hiatus and won’t have a new prime minister until next month. The favorite to take over, Foreign Secretary Liz Truss, has promised around £30bn worth of largely unfunded tax cuts – but that only increases pressure on the BoE to double interest rates into next year in a bid to curb inflation by half a percentage point dampening or such an increase in GDP expected from the tax moves.

Multiple hits from soaring household energy bills over the coming six months, deep real wage cuts and rising borrowing costs all point to the protracted demand freeze the BoE has endured after this summer’s drought and policy vacuum.

“The road is set for a searing summer of price increases, turning into a rather dreadful autumn and winter of misery as households battle this wave of inflation,” Hargreaves Lansdown’s Susannah Streeter said this week.

It all sounds pretty apocalyptic – and that’s before you read the British press.

So I guess the markets saw this coming?

Well yes and no.

Sterling is down more than 10% so far this year against a rampant dollar, UK government bond funds are down at least as much, and domestically focused UK mid-cap (.FTMC) stocks are down almost 25% in dollar terms – and have even the Eurozone is underperforming blue chips.

And yet the picture is not entirely exceptional – not yet.

UK Misery IndexUK Yield Curve and Sterling


Flattered by the weaker pound and large weights in UK-listed commodities and cyclical or ‘value’ stocks such as Big Oil, miners and banks, the FTSE100 index has outperformed many of its peers.

With losses of just 9% so far this year in dollar terms, it outperforms the S&P500, Japan’s Nikkei225 and the Eurozone’s Stoxx600 – as well as the MSCI global index.

Sterling has felt the heat, but only marginally more than the euro and much less than the Japanese yen – which has been suspended by the Bank of Japan as one of the few major central banks not to tighten monetary policy this year. Speculative positions in sterling are still net negative – but much less than the May low.

Bank of America’s global fund survey found that in August overall, 15% of funds were net underweight UK equities – and the largest one-month decline in allocations across any major region and more negative than positioning in Japan, emerging markets and the United States, where investors are overweight.

But even then, the UK underweight was significantly less than the whopping 34% negative positions in broader European equities – a figure two standard deviations below the long-term average.

Once again, the major downside for many wealth managers is the sectoral mix of UK equity indices and the FTSE100 in particular – much neglected so-called ‘value’ stocks such as banks benefiting from higher interest rates, and resource-rich oil and mining companies, companies hit by geopolitical shocks and Bottlenecks in the supply chain were boosted.

Here’s how Lombard Odier’s chief investment officer, Stephane Monier, explains why his company has maintained its overweight position in UK equities since the beginning of last year. “It had nothing to do with anticipating the long-term performance of the UK economy,” he said.

But he believes that could change now.

“At this stage I’m becoming more cautious about Britain. We are considering reducing this overweight to at least a neutral position,” said Monier, adding that this is a long-term rethinking of the direction of the post-Brexit economy that may be implemented in the coming weeks and months.

Aside from the relative ups and downs of inflation, growth and interest rates over the coming months, Monier said what worries him most is the lack of a coherent policy plan to reverse the losses to UK trade and competitiveness to offset exit from the European Union – especially now that geopolitics dictates a less open world and potential deglobalization.

“Regardless of the merits of Brexit, you have to make sure you have a really good plan to make up for what you lost by leaving the EU – and I don’t see that plan.”

UK Equity Indices vs. Sterling peers this yearEconomic Policy Uncertainty Indices

The author is the finance and markets editor at Reuters News. All views expressed here are his own

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by Mike Dolan, Twitter: @reutersMikeD Edited by Gareth Jones

Our standards: The Thomson Reuters Trust Principles.

The opinions expressed are those of the author. They do not reflect the views of Reuters News, which is committed to integrity, independence and freedom from bias under the Trust Principles.

Mike Dolan

Thomson Reuters

Mike Dolan is Reuters Editor-at-Large for Finance & Markets and has worked as an editor, correspondent and columnist at Reuters for the past 26 years, specializing in global economics, governance and financial markets in the G7 and emerging markets. Mike currently lives in London but has also worked in Washington DC and Sarajevo, covering news events from dozens of cities around the world. An Economics and Political Sciences graduate from Trinity College Dublin, Mike previously worked for Bloomberg and Euromoney and received Reuters awards for his work during the 2007/2008 financial crisis and in the 2010 frontier markets. He was a regular Reuters columnist in International New York Times between 2010 and 2015 and currently writes twice-weekly columns for Reuters on macro markets and investing.

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