Why the UK? Things are going to Get Interesting

Blain’s Morning Porridge – 18^th September 2024: Why the UK? Things are going to Get Interesting

You can walk my path, you can wear my shoes, learn to talk like me and be an angel too…”

It’s been a “meh” year for the UK markets, but they’re marginally up on the year. The outlook for a rusted economy, crashing discretionary spending, and an imminent housing collapse looks bad. As the UK electoral cycle kicks into high gear.. markets are in favour of change.

I received an urgent missive early Saturday from an old chum who follows the markets:  it was a graph of the FTSE UK Stock Index and a simple question: Why?

Funnily enough, the same afternoon I ran into him in a bar in Cowes, the sailing town on the Isle of Wight, where he repeated the question. I guess I’m destined to try and answer it… Cowes’ high street says everything you need to know about UK Inc. It’s a succession of shuttered small businesses and white-washed empty shop windows, the owners’ dreams crushed by the miserable summer, soaring rents and rates, a poor sailing season, and stretched consumers spending less.

The UK’s benchmark stock index has wibbled through a 10% range in 2023, but is currently up 2% on the year. That’s ok for a marginally unimportant index on a little country’s antique economy of jaded financials, smokestack brownfield sites, empty factories, and depressing shops at the unfashionable end of Europe.

Why the UK market has done as well as a 2% rise is as good a question as any. I suspect the answer is contained somewhere in my current read on the market: Bad is Good, and Good is Bad.

No one seems to expect much of UK stocks. This morning Goldman is on the wires predicting a 3% rise in 2024 – based on further profit pressures on an already stretched UK market.

Actually, I reckon we might be due a bounce:

• The FTSE soared 23% in the year following Tony Blair’s Things Can Only Get Better Labour electoral turnaround after 18 years of Tory Government in 1997 – but back then Britannia was cool, Britain mattered – the Americans still took us seriously – we were the darlings of Europe (you couldn’t walk along the pavements crowded with European students wanting to live and work here), and the Spice Girls were… well whatever. What is the potential for upside next year on a change in Government?

The UK remains a great place to live, but today the FTSE is not particularly interesting, liquid, or significant. The real question is why is it still so, ahem, resilient, on the back of – What? Goldman say UK retailers are going to bounce as a result of rising interest on bank savings – really? Who has still got savings? Across the UK the middle classes are being hollowed out – The Bank of Mum and Dad is broke and can’t afford to buy the kids flats when Chinese students own them all. The only people with savings are pensioners – and they are saving their money to pay BUPA because there is zero chance the NHS is going to look after them.

Using my Good is Bad and Bad is Good theme – what is currently driving UK markets?

Rising Interest rates?

Last week, the ECB chose to surprise markets and raise European rates – this was, of course, interpreted in markets as simply marvellous news on the irrefutable logic that if you raise rates today, it means you are less likely to raise them again tomorrow. Doh! The effect of raising interest rates today in terms of quashing economic activity – the traditional “destroy the economy to save it” prescription to ease inflation (the equivalent of a bowl of leaches for a broken leg) – is a lagging effect, but since its now done, the market sees it as a buy the fact moment.

Nope. Rising rates are pain still to be felt across economies. Things are not going to get economically better in the short-term – the time frame for the coming UK election.

Tamed inflation?

Silly question: any phule knows inflation is beaten because the authorities say so. The Fed and other central banks are lining up for their victory laps. Politicians around the globe are polishing up their inflation-slaying credentials for 2024 election campaigns. Prime Minister Sunak has bet the shop on falling inflation and rising economic activity to turn around his bleak electoral outlook.

Aside from the lagging damage of interest rate hikes, there is the small matter of rising oil prices (headlines as $95 a barrel is expected after Saudi speaks at the WPC meeting later today). Winter is coming to Europe – in the form of gas price rather than a legion of undead with bright glowing eyes. There is also entrenched wage inflation increasingly apparent in rising pay demands and this morning’s news UK home rentals are rising at their fastest rate ever – which further fuels upwards wage settlements. And let’s not even mention shop prices about to jump again as agri-supply chains suffer further dislocation.

The Bank of England is very aware the inflation threat is not over, and will be very, very careful not to give that impression later this week, lest they are accused of scaring the political horses!

Crashing discretionary incomes?

What is propelling current market positivity? Perhaps when the news looks unremittingly bleak, all it takes are some surprisingly strong economic signals, a negative which looks positive such as increased long-term consumer borrowing to fund current spending, or an investment bank saying something daft like a rising savings rate will boost spending.

There is a dangerous illusion of apparent prosperity around the corner. Check how long real recessions last – the 1929 depression which needed a World War to reverse it. (I’ve made many a joke about the Global Financial Crisis 2008 – 2033.. I might be about right?)  Wait till falling home prices kick in and further crush consumer sentiment – in the UK we’re looking at a 12-15% falls in home prices according to the median of economists surveyed by Bloomberg. Negative equity is rising. Sentiment is crashing. People seek hope.

Around the UK the average consumer has seen council taxes soar (yet services cut), food banks are the fastest growing sector of the economy, utilities bills are through the roof to fund dividends to shareholders to rebuild decaying infrastructure. Train fares (Unfares? Geddit?) are set to rise 8% for fewer, less reliable, and slower services. And ULEZ (charging for older polluting cars) is expanding – but less we forget it was originally Boris Johnson’s flagship policy.

Rising industrial strife?

It’s easier to ask who is not threatening to strike.

Politics?

According to a Bloomberg Survey 44% of “professional investors” believe a clear Labour victory in 2024 is the best outcome for UK markets compared to 25% who support a clear Conservative victory. My Conservative chums – yes, there are many – are betting on a “Drop the Ming Vase” moment, that someone on Labour will say something stupid. Maybe.

It is a year since Liz Truss did exactly that… Need we say more?

What became abundantly clear this week is Sir Kier Starmer has kicked of Labour’s 2024 Election Campaign. The papers are full of him. The Tories won in 2019 because Boris Johnson was a better alternative to Jeremy Corbyn.

While Starmer has purged his party, focused on message is out there selling it, Sunak remains a gifted amateur politician (picking up politics only in 2015) who tumbled into power after a string of bad emperors, who is now trapped in orthodoxy, while surrounded by a still fraxious party. Tory politicians have very sharp knives.

Five Things To Read This Morning

FT                     Keir Starmer steps on to the global stage with promise of progressive moment

Bberg               A Labour Government Would Be Best For UK Markets, Investors Say

Times               Doctors blame Rishi Sunak’s ego for striking until government ends

Torygraph         City backs Labour as Mark Carney claims Truss turned Britain “into Argentina”

Guardian          No 10 officials discussed asking Queen to talk to Johnson about his behaviour.

Out of time, and back to the day job…

Bill Blain

Strategist, Shard Capital