Easy Ride

The UK economy has been hit especially hard by the pandemic, but the country might be en route to better days and investment opportunities galore.

 

🕰 Recap

  • Back in December, Goldman Sachs recommended investing in the UK.
  • Data in February showed the UK economy faced the biggest downturn last year of any major economy.
  • And last week, the US said it’ll pause tariffs on some UK products in a boost for post-Brexit trade relations.

 

✍️ Connecting The Dots

With the world at a standstill last year, it’s not like there were high hopes for the UK’s growth prospects. But the country ended up being hit particularly hard: data out in February showed the UK economy shrank by 10% last year – the most in over 300 years and significantly more than the US economy’s 4%, the eurozone’s 7% declines, and China’s 2% growth.

Economic growth data is backward-looking, mind you, and investors – who mostly care about what’s ahead – seem to think all’s not lost. Two factors in particular could be setting up the country for a robust economic recovery: its rapid vaccine rollout, and a big rise in the household savings rate, which suggests there’s cash just waiting to be spent. Last week’s announcement from the US that it’ll temporarily lift its tariffs on some UK goods – brought on by a longstanding aerospace dispute – certainly won’t hurt either. It could lead to better post-Brexit trade relations, after all – not to mention provide a boost to Britain’s exports.

The chief economist of the Bank of England certainly reckons the UK could surprise most forecasters and deliver annual growth of 10% or more this year. Goldman Sachs, meanwhile, seems to have long been aboard the British train: the investment bank recommended investors put their money in UK assets – from its currency to its stock market – back in December.

 

🥡 Takeaways

1. UK stocks are about to have their moment. 

Better UK economic growth should show up in its companies’ bottom lines, and they might see their long-ignored shares suddenly back in fashion. The country’s stock market is still about 10% below last February’s peak, even as most other major stock markets recouped their losses or reached new heights. That’s partly because the British stock market is heavily skewed toward companies in the energy and financial sectors, both of which have been underperforming. Now, though, it’s exactly these cheap-looking “value” and economically sensitive cyclical stocks that stand to do well from the recovery.

2. The UK’s trying to broaden its appeal.

If value stocks and cyclicals aren’t your cup of tea, the UK might soon have something else to offer: young, fast-growing companies. See, while initial public offerings were off to a strong start this year with bootmaker Dr. Martens and online card retailer Moonpig, a review last week confirmed London-based listings account for only 5% of global stock market debuts between 2015 and 2020. So on the back of this review, the country’s quickly adjusting its stock market rules in an effort to tempt up-and-comers back into the fold.

 

🎯 Also On Our Radar

The UK didn’t have to wait too long to reap the benefits of its plan: Amazon-backed food delivery firm Deliveroo picked London for its stock market debut the day after it announced its intention to change its listing rules – likely the UK’s most valuable new listing for several years.

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