Negativity continues to dog the UK economy as investors worry about sluggish growth and relatively high interest rates.
UK equity funds have continued to experience outflows despite the FTSE 100 – and even the FTSE 250 – outperforming the S&P 500 year-to-date.
For many investors, the UK offers an unappealing combination of Europe-like growth and US-style interest rates.
“Today, we can see there has now been a decade of lost value in many UK companies, particularly those sensitive to borrowing costs,” said Nigel Yates at AXA Investment Managers.
“Look across the domestic stock market and there are lots of companies – particularly housebuilders, building product suppliers and real estate companies – trading at the same level they were in 2015,” added Yates.
The government is implementing planning reforms to free projects from unnecessary bureaucracy. This could help catalyse change for some companies involved in house building and infrastructure.
“This is much needed given planning approvals have fallen to the lowest level in a decade with fewer homes being built year-on-year,” said Yates.
But supply-side reforms do little to address the lack of demand, which is a function of high interest rates. Potential homebuyers are unwilling to take the plunge when borrowing costs remain so elevated.
The Bank of England held interest rates at 4.25% in June, but it was deemed a dovish hold, with three members of the Monetary Policy Committee voting for a cut.
“Currently, the market expects rates to come down another 50 basis points this year, to 3.75%,” said Yates. “To our minds, a cut of this magnitude with the potential to go further, could be the much needed catalyst.”
“The UK mid-cap sector would certainly start to benefit from rates below 4% and we would expect a sustained rally if rates fell further from there,” Yates added.
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