Column: Preparing for the dark winter of the UK economy and beyond


Commuters cross London Bridge on a hot day in London, Britain June 17, 2022. REUTERS/Henry Nicholls

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LONDON, Aug 19 (Reuters) – If Britain’s brewing economic storm looks like an outlier, British markets have yet to fully reflect it – but investors may still balk at the coming winter.

Against the backdrop of a generally lousy year for most major markets and stunning inflation and recession forecasts, UK assets have held up better than you might think.

With the unenviable record of becoming the first economy in the G7 to see inflation exceed 10% in the context of the current global price spike, the Bank of England has already scared everyone by forecasting a spike in the rate above 13% this fall, followed by the longest recession since the global financial crisis 14 years ago.

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The country is still on a leadership hiatus and will not have a new prime minister until next month. The favorite to take over, Foreign Secretary Liz Truss, has pledged some £30billion in largely unfunded tax cuts – but that is only increasing pressure on the BoE to double rates interest rate next year to contain inflation, mitigating half a percentage point. or else the increase in GDP expected from fiscal measures.

The many hits to household energy bills over the next six months, sharp cuts in real wages and rising borrowing costs all point to the long demand freeze the BoE is signaling after this summer of drought and political vacuum.

“The way is set for a torrid summer of price hikes to turn into a pretty awful autumn and winter of doom as households battle this wave of inflation,” said Susannah Streeter of Hargreaves Lansdown this week.

It all looks pretty apocalyptic – and that’s before you read the UK press.

So, presumably the markets saw this one coming?

Well yes and no.

The pound has lost more than 10% against a creeping dollar so far this year, UK government bond funds are down at least as much and UK mid-cap stocks (.FTMC) are down nearly by 25% in dollars – underperforming even the eurozone blue fries.

And yet the picture is not entirely exceptional, at least not yet.

UK Destitution Index
British Yield Curve and British Pound


Flattered by the weaker pound and heavy weightings in UK-listed commodities and cyclical or ‘value’ stocks like oil majors, miners and banks, the FTSE100 index actually outperformed many of its benchmarks. peers.

With losses of just 9% in dollars so far this year, that beats the S&P500, Japan’s Nikkei225 and the Eurozone’s Stoxx600 – as well as the MSCI World Index.

The pound felt the heat, but only slightly more than the euro and much less than the Japanese yen – which has been exposed by the Bank of Japan being one of the few major central banks not to tighten the monetary reins this year. Speculative positions in the pound are still net negative – but much less than the May low.

Bank of America’s global fund survey showed a net overall 15% underweight in UK equity funds in August – and the biggest one-month fall in allocations of any major region and more negative than positioning in Japan, emerging markets and the United States, where investors are overweight.

But even then, the UK underweight was significantly lower than the 34% net negative positions in broader European equities – a reading that is two standard deviations below long-term averages.

Again, the big compensation for many asset managers is the sector mix of UK equity indices and the FTSE100 in particular – heavy on overlooked so-called ‘value’ stocks such as banks which are taking advantage of higher interest rates and also oil and resource-rich mines. businesses spurred by geopolitical shocks and supply chain cuts.

This is how Stéphane Monier, Chief Investment Officer of Lombard Odier, explains why his company has maintained its overweighting in British equities since the beginning of last year. “It had nothing to do with anticipating the secular performance of the UK economy,” he said.

But he thinks that may now change.

“At this point I am becoming more cautious on the UK. We are considering reducing this overweight to at least a neutral position,” Monier said, adding that this was a long overhaul. term of the direction of the economy post-Brexit and may well be executed in the weeks and months to come.

Beyond the relative ebbs and flows of inflation, growth and interest rates in the months ahead, Monier said what annoys him most is the lack of a coherent policy plan to compensate for losses to UK trade and competitiveness following its exit from the European Union – especially now that geopolitics dictate a less open world and potential de-globalization.

“Regardless of the merits of Brexit, you need to make sure you have a really good plan to make up for what you lost by leaving the EU – and I don’t see that plan.”

UK Stock Indices vs Peers
sterling this year
Economic Policy Uncertainty Indices

The author is Finance and Markets Editor at Reuters News. All opinions expressed here are his own.

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by Mike Dolan, Twitter: @reutersMikeD Editing by Gareth Jones

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The opinions expressed are those of the author. They do not reflect the views of Reuters News, which is committed to integrity, independence and freedom from bias by principles of trust.


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