This week, UK stocks staged their largest rally since January as investors warmed up to a market which has missed the global gains of this year.
Bloomberg data shows that a drop in UK Inflation greater than expected in June led to a 3.1 percent rise in London’s FTSE All-Share Index in the week ending Friday. This is the best performance since the 3.3 percent gain it achieved in the first weeks of the year.
Housebuilders and property groups are among the top gainers. Persimmon and Barratt Developments all rose more than 10% over the past week, as traders lowered their expectations about where interest rates will peak due to tentative signs of a cooling of price growth.
The FTSE 100 eked a modest 1 percent gain last year, and reached a record-high in February. The index is still far behind the US and Europe in 2023. The S&P 500 index in New York and the Stoxx 600 index for Europe have both risen 18% and 9.3% respectively since January. This compares to a 2% rise on the FTSE 100.
Some argue that UK stock suddenly has the wind in their sails.
Neil Birrell is the chief investment officer of Premier Miton. He said: “I wonder if we will look back on that [inflation] reading from June and think it was the day that triggered a change.” Birrell stated that the UK stock market was cheap by historical or international standards. He said that although companies are cheaper here than overseas, they aren’t worse. “Yes, the UK is in a state of malaise, but the value of the stock market here has reached a new level.”
Becky Qin is a multi-assets investor at Fidelity. She too, was drawn to the UK’s prices. She said, “The valuation is really quite cheap. We are happier to have UK large cap than continental Europe or the US based on valuation grounds.”
Roger Lee, the head of UK equity strategies at Investec said that “the psychological importance of inflation falling below 8 percent after months of reports higher than expected was important.” This suggests that the UK doesn’t have a structurally high, exceptional inflation problem compared to the rest the world. “Now is the right time to invest in UK plc.”
Other investors argued that UK equity remained a “value trap” for investors. Nick Train, a fund manager, said that UK stocks were “abysmally out of favor” and could remain “frustratingly low for a long time”.
His claims are supported by data. Barclays says that UK equity has not seen a single week of positive inflows this year. The latest Bank of America global funds manager survey shows a net 21% of investors are underweighting the UK. Sonja Laud is the chief investment officer of Legal & General Investment Management. She believes that UK will soon slip into a depression, which will impact equities.
Birrell seemed less worried. He said that there will probably be a recession but it won’t matter if it isn’t a deep one. He was more concerned about a possible increase in mergers and purchases. Our fund managers do not want to see too many takeovers. “You won’t have the opportunity to make money when others take over companies that are doing well.”