Editor's letter

UK stocks finally start to rise – but not as one

The UK Stockmarket recovery is finally getting some traction, says Merryn Somerset Webb. But not all stocks will recover in the same way.

We’ve been telling you that the UK stockmarket looks ridiculously cheap for some time now. We’re finally getting some traction. The FTSE 100 rose more than 12% in November as attention turned to the fact that we are nearer the end of the nightmare of rolling lockdowns (the first Covid-19 vaccines will roll out in the UK next week) – and possibly to the end of the relentless negativity around the type of trade deal we end up making with the EU. 

Even the analysts at Goldman Sachs are coming around to our way of thinking. The future of the UK is “not all negative”, they say (which is nice). We should get a “thin” trade deal (this may be the best kind) to work with; we will recover fast post-Covid-19; and crucially our equities are cheap (on a 10%-15% price/earnings discount to most European markets), and value orientated. 

That value bias has not served UK investors well in the growth-crazed environment of the last few years. But it might now – see our cover story on the great stockmarket rotation and the return of the commodity supercycle. The latter comes with one of the oldest stockmarket stories there is. Demand fell. Prices fell. Supply contracted. Now demand is on the up again. The supply isn’t there to meet it. So prices are rising. 

Not all value-orientated stocks will recover in the same way. As Barry Norris points out in an upcoming podcast the way in which this crisis has dragged out has meant that some of the things that looked like short-term behavioural adjustments in April may now settle in as habits. 

So while we will go back to our offices (we have to – careers are made from face-to-face contact) we won’t go to them quite as much as we did. Office space will stay a little less valuable and residential space a little more valuable than before (UK house prices are up 6.5% on the year and mortgage approvals are at a 13-year high). High street shops without a special experience element or a thriving online business won’t make it (as we can see from the fall of Philip Green). But come the spring, an awful lot of other things will go back to normal and far, far beyond. With the saved (and newly-created) Covid-19 cash burning holes in our pockets, we will eat, drink, shop and travel ourselves into a brilliant economic boom. Goldman sees UK GDP rising 7% next year. You’ll want to be invested in that.

What you won’t want to be is complacent. As John notes, government responses to the deflationary threat brought on by their lockdowns have been pretty much the same everywhere: huge money creation. Once that money gets moving in our new boom, it will create inflation. Then things will get more complicated (more on why you should worry about this in next week’s podcast with market strategist Russell Napier) and (once we get to 4% or so, says Napier) we will need to rethink our equity exposure. Stocks may be on the edge of a “roaring early-20s” rather than a “roaring all-of-20s”. Meanwhile some of you will want to hedge that inflation (and the nasty combination of inflation rising far above interest rates) with a little bitcoin. I’m sticking with gold. Bitcoin has no history of successfully preserving capital in times of inflation and financial repression. Gold does.

Recommended

Persimmon yields 12.3%, but can you trust the company to deliver?
Share tips

Persimmon yields 12.3%, but can you trust the company to deliver?

With a dividend yield of 12.3%, Persimmon looks like a highly attractive prospect for income investors. But that sort of yield can also indicate compa…
1 Jul 2022
The MoneyWeek Podcast: nuggets of positivity in an extended bear market
Investment strategy

The MoneyWeek Podcast: nuggets of positivity in an extended bear market

Merryn and John talk about he need for higher wages and lower house prices, and why the fact that this is the least dramatic bear market they’ve ever …
1 Jul 2022
Here are the best savings accounts on the market now
Savings

Here are the best savings accounts on the market now

With inflation at more than 9%, your savings are not going to keep pace with the rising cost of living. But you can at least slow the rate at which yo…
1 Jul 2022
Don’t try to time the bottom – start buying good companies now
Investment strategy

Don’t try to time the bottom – start buying good companies now

Markets are having a rough time, so you may be tempted to wait to try to call the bottom and pick up some bargains. But that would be a mistake, says …
1 Jul 2022

Most Popular

UK house prices are definitely cooling off – but are they heading for a fall?
House prices

UK house prices are definitely cooling off – but are they heading for a fall?

UK house prices hit a fresh high in June, but as interest rates start to rise, the market is cooling John Stepek assesses just how much of an effect h…
30 Jun 2022
The ten highest dividend yields in the FTSE 100
Income investing

The ten highest dividend yields in the FTSE 100

Rupert Hargreaves looks at the FTSE 100’s top yielding stocks for income investors to consider.
22 Jun 2022
Gold has been incredibly boring to own – but that’s no bad thing right now
Gold

Gold has been incredibly boring to own – but that’s no bad thing right now

Stocks, bonds and cryptocurrencies have all seen big falls this year. But gold remains at its one-year average. It may be dull, but it’s doing what it…
29 Jun 2022