Andrew Miller: Groundhog Day for UK investors

There have been three key supports for stocks since 2009: economic growth; cheap valuations; and the stimulus provided by Central Banks (liquidity)

Andrew Miller
Andrew Miller

These factors are all still relevant, but have matured, meaning the easy call on whether to buy equities is likely behind us. In the UK it’s starting to feel like déjà vu all over again, despite mid-cycle blues which do usually favour stocks over bonds.

Key business surveys continue to show manufacturing confidence at above-trend levels in the biggest developed economies.

It has rebounded from a weather-affected first quarter in the US, and has stabilised even in China – where “trend” growth is much stronger to begin with. Unusually, output expectations are particularly elevated in the UK.

Ongoing economic growth should support corporate profits, and underpin stock valuations, but if it starts to mop up liquidity, and threatens to normalise interest rates more quickly, it could have some uncomfortable side effects.

They may not last for long, but investors used to easy money and soothing words from central banks could find that things get tougher from here – as they did during the dress rehearsal when bond yields rose sharply in mid-2013.

After spending much of the past three years seemingly in limbo, the UK may face more growing pains than most in 2014.

Unusually, the Bank of England is currently over-delivering on its inflation mandate – CPI inflation is below its 2% target for the first time in five years and seems likely to stay there for a while.

But the UK’s chequered track record means this cannot be taken for granted: the UK is the least likely big economy to move into sustained deflation – not that we expect much deflation anywhere, or worry unduly about it.

And interest rate risk has a real as well as a nominal component: vigorous growth can squeeze rates higher even if inflation stays subdued.

The IMF agrees that the UK is likely to be the fastest-growing large economy this year.

First-quarter data shows GDP again growing at an annualised pace of nearly 3%, while employment data paints a more upbeat picture again, hitting new all-time highs even as GDP has yet to fully close the gap with its pre-crisis peak – perhaps suggesting that the recent level of GDP is, if anything, being underestimated.

Recent retail sales data shows a pronounced surge, and national UK house prices defied gravity through the downturn and have recently picked up.

That resumed surge in house prices is a little unsettling. It has been deliberately fostered by the government, even as the UK economy has made less progress than the US in tempering its external imbalance.

In the UK, as in the US, the private sector is still in financial surplus, and there is still plenty of slack in the economy; and, as noted, the inflation picture is fine for now.

But this is starting to feel like the economic equivalent of Groundhog Day, and the movie isn’t so funny the second time around, even if it’s just starting.

UK policy rates may be the first to rise, possibly before year-end, and sterling is firming in anticipation, albeit from pretty competitive levels.

Our misgivings may not matter much for the main UK stock indices: like the Premier League, these are dominated by overseas, not local, players, and the UK is not one of our preferred markets to begin with. But local business, and the gilt market, may be forgiven for thinking that it’s a case of déjà vu all over again.

Andrew Miller, director of Barclays Wealth and Investment Management in Newcastle

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