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In many ways, that’s unsurprising. Real GDP is unchanged since 2019, corporate sector earnings have contracted in real terms, and housing activity has dried up. Both the IMF and OECD, on their latest growth forecasts, put the UK at the bottom of the G7 pack.

Why, then, have UK equities been so resilient? Since 2020, they’ve traded in line with US equities (measured in US dollars, on a total return basis, and across large, mid, and small cap stocks – see chart below). With that, key parts of the UK market have performed well. UK banks, for example, are up 21% YTD in USD terms. The NASDAQ100, in contrast, is up 7% YTD.

All of which begs the question: Is the global equity market trying/starting to rotate away from US growth stocks and into other sectors? Or is US equity market leadership merely pausing for breath, with further to run?

Changes in global sector leadership happen every 5 – 6 years on average. US tech stocks, of course, have been the only game in town for longer than that (arguably since 2015). One day, though, they won’t be – and flows will haemorrhage out of the sector.

Historically, leadership switches occur when: (i) valuation discrepancies become extreme; and (ii) there’s a new/emerging macro theme (i.e. that triggers/drives the asset allocation switch).

Clearly the UK valuation discount to US stocks is extreme. The question therefore becomes: Is a new macro theme likely? Is the weak UK growth backdrop of recent years about to change/reverse?

Upside risks to UK economic and earnings growth, in that respect, are building. In particular, that reflects a combination of: (i) increasingly strong UK household cashflow growth (likely this year and next); (ii) a significant BoE rate cutting cycle; and (iii) a re-acceleration in UK house price growth, which should generate positive wealth effects and enhance consumer appetite for spending and re-leveraging.

Often major changes in asset price direction happen when (i) positioning & sentiment become crowded & extreme; and (ii) when the macro narrative turns. Arguably, both of those conditions are now in place for UK equities.

NB This is a shortened/edited version of our latest weekly asset global allocation (SAA) publication. If you would like a copy of the full text plus charts, pls email: nick@longvieweconomics.com


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