With the US beset by political violence and France facing parliamentary gridlock, Britain is rapidly starting to look like “an island of stability”, says Alex Brummer in the Daily Mail.
The “Truss tantrum” is becoming a “distant memory”; the UK has had “two successive quarters of robust growth”, while a “centrist” administration with a big majority” takes the reins. In a sign of growing market confidence, the pound has risen to a one-year high against the US dollar.
After a multi-year slump, sterling has been one of the top-performing currencies so far this year. Stocks haven’t quite joined in, with a 5.5% gain for the FTSE 100 lagging other big markets in 2024. There is a question mark about UK public finances as public borrowing approaches 100% of GDP, say Naomi Rovnick and Anousha Sakoui on Reuters. UK gilts have underperformed their US and German counterparts so far this year.
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British stocks turning bullish
Still, for the first time since the 2016 referendum, major financial institutions are turning bullish on Britain. “Given the perceived political stability leading to better sentiment, we think there’s a tactical opportunity for UK equities,” says Wei Li of BlackRock, the world’s largest asset manager.
On a near-50% valuation discount to the US, the FTSE’s “risk-reward [ratio] is pretty favourable”, says Dennis Jose of BNP Paribas. It will take time before foreign investors return to London, but one catalyst for a rally might be a forthcoming shake-up of takeover rules, designed to staunch London’s loss of companies to foreign exchanges.
“Segments of the City and the broader business community are, of course, concerned by potentially costly tax increases,” says Patrick Jenkins in the Financial Times. Loopholes favouring private equity will be closed, and “there are suspicions that capital gains and inheritance-tax regimes could be made more punitive”. But Keir Starmer has done a good job convincing the Square Mile that a Labour government “will be a source of stability and predictability”.
His promise of better relations with the EU is a priority for international financiers, who have had to pay to “double up on staff, functions and capital” to deal with post-Brexit red tape. The UK market is trading on 12-13 times forecast earnings, compared with 16 in Japan and a “meaty” 23 times in the US, says Russ Mould of AJ Bell.
That discount is partly justified – the UK’s financial and commodities firms don’t have the same stellar growth prospects as Silicon Valley tech. However, the last decade of low inflation, low growth and low interest rates was especially favourable for tech stocks. This era of higher inflation and higher interest rates could leave London positioned to outperform.
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