The UK is unloved and mispriced. There are a range of reasons given for this, one of which is the UK’s problem with sticky inflation. Today, the UK inflation rate came in lower than expected. Rebecca Maclean, investment director at abrdn looks at why this is positive for the UK market, long duration assets and UK domestics. As manager of the abrdn UK Sustainable Equity Fund, Maclean thinks now is a good time to revisit the case for UK equities.
Today, UK Consumer Price Index (CPI) came in below expectations at 7.9% (v estimates of 8.2% ), with core inflation rise of 6.9% for June.
Maclean notes: “The UK is seeing falling energy prices, but also easing food, household goods and hotel costs. This comes as a relief to markets and central banks which have grown concerned that inflation in the UK was proving to be sticker than in other countries. The UK market is currently unloved and mispriced, so this could mark a trigger to revisit the investment prospects of the UK market.
In a surprise decision, the Bank of England accelerated monetary tightening in June, raising interest rates by 50bp to 5% in an effort to address inflation. A disappointing May inflation print led interest rate expectations back up to levels following the disastrous ‘mini-budget’ last year.
“At one-point last month, the market was pricing in peak Bank rates close to 6.75%. Looking forward, markets are breathing a sigh of relief. Swap rates should move lower and this will be supportive for both the UK equity market and UK domestic performance.
“Looking specifically at the UK Sustainable and Responsible Investment Equity Fund, after a strong start to the year, the Fund lagged the benchmark in June. The macro environment proved challenging for markets, long duration assets and UK domestics.
Maclean continues: “To give a sector example, UK fixed rate mortgages rose above 6% this month, up from 1% in 2021. This has material implications for mortgage affordability, house prices and volumes. One of the most UK cyclical sectors is the UK housebuilding sector. It is no surprise then that the sector is trading at discounted valuations, as the market expects earnings to deteriorate. We have a holding in the UK housebuilder Bellway in the UK Sustainable Fund. Bellway has a net cash balance sheet with >6% dividend yield. Today’s news is supportive for Bellway and for wider sentiment towards this sector.
Today markets are breathing a sigh of relief that the inflation challenge facing the UK could be easing and with it interest rate expectations.
“The UK market is unloved and is trading at a highly discounted valuation compared to its history and other markets. Valuations, both of our holdings in the UK Sustainable Fund and the UK market in aggregate, look attractive, presenting the possibility of strong returns in the medium term. Easing inflation and interest rates could provide a trigger.”
