The economy and stock market are anticipated to, at best, move in a sideways direction as the United Kingdom approaches an election year.
Cautious growth expectations and the status of low-cost, neglected companies dominate investing analysts’ assessments of the United Kingdom’s financial conditions and outlook.
The FTSE 100, which momentarily peaked at 8,000 in February, has otherwise remained stagnant this year, and stocks have maintained their “bargain” status.
Elections are due no later than January 28, 2025; however, they are more likely to occur in the autumn of the following year, given that the government would prefer not to conduct campaigns during the Christmas season.
Following a year in which growth was inexorably restrained by high-interest rates (although Bank of England policymakers did hold inflation in check and avert a recession), focus will shift to the economic expansion strategies of the political parties.
Below is a compilation of investment industry specialists’ predictions regarding the future direction of UK equity markets, as well as fund recommendations for the coming year.
Almost every sector in the United Kingdom is trading at an “abnormally high” discount.
Stagflation Concerns and Investment Opportunities in 2024
“Head of investment strategy at RBC Wealth Management, Frédérique Carrier, predicts that if the labour market continues to deteriorate, the United Kingdom may well experience stagflation in 2024 due to sluggish economic growth and persistent inflation.”
We believe that the Bank of England is not inclined to reduce interest rates prior to the latter part of the year.
She continues, “We see opportunities for patient investors despite the unfavourable macroeconomic environment.” Investors largely underappreciate United Kingdom equities, despite their attractive valuation and defensive qualities.
Carrier is of the opinion that a Labour victory in the 2024 election would not provoke a significant adverse reaction from financial markets.
Asserting a closer relationship with the European Union, deregulating the planning rules for new homebuilding, bolstering employment rights, and advancing the transition to a low-carbon economy are the key tenets of Labour’s platform, according to her summary.
However, according to Carrier, the EU is not likely to support a “cherry-picking” strategy for improving relations with the United Kingdom, and planning reforms may continue to face fierce opposition.
Importantly, Labour would assume the governorship of a country that is severely indebted, with gross debt to GDP approaching 100 percent, and has deep scars—not only from Brexit but also from the Bank of England’s fastest spree of monetary policy tightening in three decades.
“All of this may hinder the ability of a new government to restart the economy”
In regard to prospects in the underappreciated market of the United Kingdom, Carrier asserts that the FTSE 100’s defensive attributes will serve it well in 2024, despite the anticipated heightened volatility of the global economy and equities.
Furthermore, the fund exhibits a predilection towards sectors associated with the old economy, such as energy (which accounts for around 14% of the FTSE 100). We consider this sector to be currently advantageous in terms of risk and reward, owing to the constrained supply-side conditions, low valuations, and burgeoning earnings momentum.
Significantly, equity valuations in the United Kingdom seem undemanding, as nearly every sector is currently trading at an abnormally high discount compared to historical norms.
“Many leading UK-listed global companies continue to be valued at a significant discount compared to their international peers listed in other markets,” says Carrier.
This situation, which we consider to be an unjustified “UK market discount” on these multinational corporations, presents an opportunity for long-term investors to purchase these equities.
Consider “strength and quality” when making investments
Rob Morgan, chief investment analyst at Charles Stanley Direct, declares that investors have cause for celebration as the market returns to a more “normal” state of affairs.
He suggests that as interest rates progressively decline and fixed or rising yields on other assets gain appeal, cash may begin to lose its allure as inflation declines.
However, he issues a warning: “The long-term consequences of increased interest rates may have an impact on company profits, particularly if developed market economies continue to balance higher borrowing costs with recessionary sentiment.”
“Mortgage payments and household expenses serve as a simple indication of the increased operating expenses and debt obligations that organisations of all sizes are experiencing.”
Prior to pursuing opportunities, Morgan advises investors to seek reassurance in the balance sheet’s robustness and earnings resilience, preferably with net liquidity.
This necessitates an emphasis on quality and resilience in both the stock and bond markets, in addition to the utilisation of enduring structural growth themes.
Diversification by sector, geography, and asset type is always prudent for mitigating risk and preventing excessive dependence on a single area or set of conditions.
The British market is still inexpensive, and “takeover kings” may look for deals
Recent statistics depicting the performance of the UK market would be “horrifying” due to the fact that it is still inexpensive, unloved, and under-owned, according to Ben Yearsley, investment director at Shore Financial Planning.
However, he believes that even modest rate cuts could signal significant money takeovers.
“In all honesty, investors likely require a mega deal involving a FTSE giant to awaken to the value.” In one respect, 2023 was an extraordinary year: a record number of British corporations purchased their own shares.
“UK PLC is in solid financial condition; the takeover kings will recognise this and pursue deals.” Small, medium, and large appear inexpensive, as do value and development.’
Yearsley claims that his FTSE forecast of 8,000 has remained unchanged for the past two years. and intend to repeat this for 2024.
“I consider this year a moral victory, given that in February it reached an all-time high of 8012.”
“Obviously, FTSE forecasts are a bit of a joke; however, the fact that I’ve had the same number for the past few years demonstrates how sideways the UK has been in recent years – although to be fair, so has the S&P 500.”
However, he cautions: “If rates are reduced in 2024, growth and quality trade will likely return, which means the FTSE will have difficulty gaining ground despite its low valuation.” 8000 seems like a respectable sum to begin the third consecutive year!
Good news for investors is that the market already accounts for negative news
There is a lingering risk of recession and next year will not be one of rapid or sustained economic growth, warns Emma Wall, director of investment analysis and research at Hargreaves Lansdown.
In recent weeks, the market consensus appears to have disregarded concerns of a recession and is now factoring in a Goldilocks scenario in which central bankers reduce interest rates voluntarily, rather than in response to an economic hard landing.
“Our outlook is not quite as optimistic.” Debt-laden nations and corporations that accumulated debt during an era of negative interest rates will struggle to cover their borrowing expenses. Any economic downturn will severely affect tech and growth stocks, while hot money will migrate to lower-risk assets.
“While experts anticipate a decline in inflation, it will persist above the targets set by both the United States and the Bank of England for a considerable period.”
“Investors have already priced this bad news into the market, which is good news,” says Wall.
“For a number of years, the UK stock market has traded at a discount to its international counterparts; initially, Brexit, then a dearth of technology stocks, and finally, a political upheaval, which has rendered the United States more attractive relative to the UK.”
“However, we believe the domestic market unfairly discounts some outstanding companies.”
Furthermore, despite the fact that volatility is likely to persist until 2024, this could be an excellent opportunity to acquire inexpensive equities with international revenues, attractive dividends, solid balance sheets, and adequate dividend coverage.