I’m beginning to sense a notable shift in sentiment regarding the prospects for the UK economy.
Brighter prospects for UK investors
Up until recently the prevailing wisdom amongst many analysts was that any economic recovery brought about by the lifting of Covid restrictions would be short-lived and followed by a downturn as unemployment levels rose, government support for business ceased and demand fell back.
However, it's now beginning to look as if the consensus is moving away from that view. The reason is mainly down to a range of data reported recently and the encouraging trends they present. Most importantly, the fact that the vaccine rollout has proceeded as planned and around 65% of all adults have now received at least a first vaccination, is very encouraging for the markets. The chances of any further national lockdowns now look remote which provides more of the one vital factor that big investors crave; certainty. Certainty that businesses can begin to return to normal in a sustainable way.
Other recent official figures have shown unemployment hasn’t risen as high as many feared by this stage, while retail sales have remained healthy. Economic data suggests the second quarter of the year has started very well in the UK and, when put alongside the ongoing financial support by the government, it isn’t surprising to see many economists raising their forecasts for GDP growth in 2021 to 6% and higher.
If the reopening plan continues as laid out by the government and travel & leisure can begin to resume in May and June, then the good prospects will be further underlined. This has all led to much talk by fund managers about cyclical stocks, which are companies whose performance closely tracks the health of the economy.
Given the complexity of the situation with every country in a slightly different position in relation to restrictions and lockdowns, it is quite challenging to make short term forecasts for multinationals. However, the first quarter earnings season is now in full swing and this year, more than ever it is worth listening closely to what company executives expect for the remainder of the year. Banks and oil companies are both cyclical in nature and positive trading updates from BP and HSBC recently help to explain why fund managers are looking more closely at these sectors as economies reopen.
However, major question marks remain, especially around inflation which is forecast to rise. That raises the possibility that interest rates could begin to edge up which would increase borrowing costs and make life especially interesting for the UK government given the scale of debt it has built up as a result of supporting the economy through the pandemic. That could lead to pressure on public spending and tax rises. For that reason, the Bank of England will be very loathed to raise interest rates but if inflation looks likely to remain high they may not have a choice. But overall prospects for equity investors continue to look good.
All information given including prices, yields and our opinion is correct at the time of publication. Our opinions on investments can change at any time and for our latest view please go to www.share.com. To understand how our Investment research team arrive at their views please read our Investment Research Policy.