Traders see upside for UK assets despite storms and strikes

LONDON: A growing chorus of investors are becoming more upbeat on UK assets from the pound to stocks as the economic outlook brightens, even as the country is rocked by floods, storms and strikes.

Goldman Sachs Group Inc and Bloomberg Economics entered January by raising their growth projections, offering hope for an economy that spent much of the past year in the grip of recession speculation.

In markets, analysts upped their forecasts for sterling and investors recently turned bullish on the currency for the first time in three months.

Some are also seeing signs of a turnaround for stocks amid stronger numbers from retailers.

The bets on the United Kingdom outperforming still risk coming unstuck.

Ongoing disruptions to transport and health services from weather and industrial action pose threats to demand.

If inflation fails to fade further, pressure would also mount on the Bank of England (BOE) to keep interest rates higher for longer, undermining bonds.

The pound, which rallied in the final months of 2023 as the US dollar suffered, has nevertheless kept up its momentum so far in 2024.

As the greenback rebounded against major peers last week, sterling was the only one to eke out gains. The median forecast in a Bloomberg survey is for further strengthening until the end of the year.

Goldman Sachs last month boosted its pound forecast, predicting a gain to US$1.30 in six months instead of a retreat to US$1.20, its previous estimate.

Fidelity International is even more bullish, betting it will strengthen to US$1.40 this year. Sterling was trading around US$1.27 last Friday.

“The winner from this should be sterling,” said Stuart Cole, chief macro economist at Equiti Capital in London. “It should benefit from an interest rate differential that will increasingly move in its favour over the course of the year.”

Evidence of a stronger than expected economy is mounting. UK house prices defied predictions of a slump in 2023 and mortgage approvals also came in better than forecast.

Meanwhile, the final services and composite purchasing managers index readings for December were revised remarkably higher.

The outlook for consumers and the broader economy is being supported by rising wages in real terms and anticipation of the BOE loosening, with five quarter-point rate cuts expected this year.

This gives Chancellor of the Exchequer Jeremy Hunt more wriggle room to deliver tax cuts in the run-up to an election expected later this year.

In an interview with the BBC on Sunday, Prime Minister Rishi Sunak said the economy had defied predictions of a recession and “outperformed” other countries, including Germany.

Data scheduled for release this week is predicted to show the overall economy and industrial production gained in November.

In stocks, there has also been news suggesting a better economic backdrop.

Next Plc, seen as a high-street bellwether due to its mid-market offering, raised its profit forecast after a better than expected Christmas.

Still, analysts at HSBC Holdings Plc offered caution, warning that there could be a decline in spending in the first quarter as consumers “pay back” what they spent over Christmas.

Meanwhile, Citigroup Inc strategists, led by Beata Manthey, have an underweight rating on UK shares, warning that higher rates are spurring unemployment, and a weaker US dollar and oil price could also weigh on London-listed stocks.

Even if the economic expansion is looking better than once expected it remains fragile. Equiti’s Cole said growth looks set to remain constrained by high borrowing costs and a still tightening financial policy.

For many households, coming out of a brutal inflation squeeze that ripped through incomes, it’s still going to be a grind.

And monthly gross domestic product figures for November due this week may show the economy on track for a technical recession, two straight quarters of falling output, in the second half of 2023.

There’s also going to be a short-term hit in early 2024 as the United Kingdom suffers through another series of planned industrial disputes.

“The winner from this should be sterling. It should benefit from an interest rate differential that will increasingly move in its favour over the course of the year.”

Stuart Cole