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Despite the Government’s tale of woe about the British economy, conditions for investing in UK stocks and bonds have rarely been more attractive since the Brexit vote.
UK government bonds, or ‘gilts’, as well as shares, property and the pound look like bargains.
Because? Because they are trading at a discount to their major foreign counterparts, having fallen out of favor with domestic and foreign investors.
But sentiment is changing as our economy confounds experts by returning to growth instead of stagnating like Germany and France.
With electoral uncertainty behind us and with lower interest rates likely to help the economy gain momentum, the British economy and its financial markets are in a much better position to outperform those of other major European countries.
Deals: UK government bonds, or ‘gilts’, as well as shares, property and the pound are trading at a discount to their major foreign counterparts.
This positive backdrop has not gone unnoticed by domestic and international investors, as evident from the huge oversubscription of this month’s government bond auction.
This attracted more than £100bn in purchase orders for just £8bn of new bonds maturing in January 2040, with an interest rate of 4.375 per cent.
The clamor for these gilts is in stark contrast to the dark days following Liz Truss’ mini-Budget in 2022, which triggered a run on sterling and a collapse in gilts.
In retrospect, it is clear that UK markets had fallen into stagnation long before the Truss debacle.
There were fears that an economic crisis would follow the Brexit vote in June 2016. The pandemic exacerbated these concerns.
Investors chose to put their money in US and European stocks and bonds. This myopic stance was compounded by adherence to global benchmarks, by which pension fund investment performance is judged.
Under this benchmark, the UK stock market accounts for just 4 per cent of the total global market value of all shares. As a result, many UK pension funds have reduced their holdings of British shares to just 4 per cent.
But this may be about to change. Chancellor Rachel Reeves is keen to boost UK pension funds’ engagement with UK plc. If pension funds were forced to follow a national benchmark, this could trigger a dramatic rerating of bonds and stocks.
Since the Brexit vote, the blue-chip FTSE 100 index has generated a total return of around 79 per cent. This is the lowest performance of the five major stock markets in sterling terms.
The German Dax index generated 101 percent, while the United States took first place with 246 percent.
The average UK share remains cheaper than its overseas counterpart, based on expected earnings growth and medium-term dividend prospects.
Investment boost: Chancellor Rachel Reeves wants to boost UK pension funds’ engagement with UK plc
The same goes for government bonds, where the yield on the 30-year bond is 4.59 percent, versus 4.13 percent on a 30-year U.S. Treasury bond.
When the price of a bond falls, its yield increases. The 30-year equivalent French government bond has a yield of 3.59 percent, while a German bond offers a yield of 2.48 percent.
On this basis, gilts offer a higher annual income than their overseas equivalents, plus the potential for tax-free capital gains. The risk is also lower because our economy is in better shape than critics believe.
The catastrophe that was predicted as part of ‘Project Fear’ has never materialized. The value of the pound against the euro was 1.18 euros just after the referendum and has barely moved since then, exceeding 1.20 euros in recent days.
Although the UK’s fiscal situation is not exactly good, things are much worse in both France and the United States.
America’s budget deficit and national debt are about to get out of control. These debts, amounting to $35 trillion, are increasing by approximately $1 trillion every 100 days.
Whoever wins the next election will have to address the growing mountain of debt. Otherwise, the United States will head to the territory of the Latin American banana republics, only without bananas.
Similarly, France is also a fiscal basket case, with public debt at around 126 per cent of total GDP, compared to 100 per cent for the UK.
And yet French government bonds yield significantly less than UK bonds.
Political issues are also not to blame for this relative cheapness of UK assets.
The political situation in France is in chaos, and regardless of what the US elections promise, there will probably be no stability in the coming years.
Meanwhile, Sir Keir Starmer has a majority of 174 seats. Like it or not, this is a haven of stability, compared to the other two.
- Ian Williams is Chairman of Charteris Treasury Portfolio Management.
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