UK stocks finally start to rise – but not as one

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.

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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.