UK inflation has started to fall and this should create more optimism for UK equities, according to an UK equity income fund manager.
The Consumer Prices Index rose by 6.8 per cent in the 12 months to July 2023, down from 8.7 per cent and 7.9 per cent in May and June respectively.
With UK inflation starting to come down, this should create more optimism for UK equities, said Clive Beagles, co-manager of the JOHCM UK Equity Income Fund. But citing flow data, he does not think this has happened yet.
“The flow data has been fairly constant one-way traffic in terms of people still selling the UK, even though it looks very modestly priced,” said Beagles.
According to Calastone’s August Fund Flow Index, for example, UK equity funds saw their 26th consecutive month of net outflows.
Kingswood Group chief economist Rupert Thompson likewise said the recent fall in inflation has not created any more optimism for UK equities, which have underperformed other markets over the past month.
“The reason is that there has been no clear reduction yet in underlying inflation pressures, and the fall in headline inflation has merely led to expectations for further rate hikes being scaled back, rather than increased hopes of an early reduction in rates,” he said.
Thomas McGarrity, head of equities for RBC Wealth Management in the British Isles, said the stickiness of core inflation in the UK may require a recession to get medium-term inflation expectation back towards the Bank of England’s 2 per cent target.
“Accordingly, we remain cautious on the UK domestic picture, and continue to recommend being extremely selective towards domestically-focused UK stocks. We continue to maintain a bias for globally oriented businesses within UK equities.”
Thompson at Kingswood predicted that a “major rebound” in UK equities looks likely to have to wait until next summer. “By [then] we should be close to the first rate cut and markets should be anticipating a recovery in the economy.”
The prospect of interest rates staying higher for longer and growth being “anaemic” has led to little optimism for UK equities, said Dan Boardman-Weston, CEO and CIO at BRI Wealth Management. “The result of current economic conditions and past political instability has made UK equities deeply unloved,” he added.
But with the UK having a significant bias towards the value factor, Beagles said there was an expectation that, with interest rates no longer close to zero, this would have attracted investors back to value as a style.
“It did a little bit last year, [but] then artificial intelligence took off this year… Whereas actually if you step back a bit, from a style point of view people ought to be considering having more value.”
