Fifty years ago, in October 1962, four lads from Liverpool released their first single. It was a modest hit, reaching number 17 in the charts, and although its ‘love me do’ refrain was catchy there was little to suggest the group would go onto greater things.
On the same day, a relatively low-budget British spy caper was released to a mixed critical reception. Over time, both The Beatles and James Bond would become global icons – their successes in sharp contrast to Britain’s declining economic influence during the same period.
As growth in the major economies of Asia and Latin America continues to outstrip that seen in the UK, why should equity investors still bother with these seemingly ill-fated isles?
Such a question, however, is predicated on a common misconception: that a country’s level of economic growth correlates with the performance of its stock market. China has seen its economy grow over the past three years at a rate which any developed country would envy; yet the Shanghai Composite index has underperformed the FTSE All-Share by almost 50% over that period.
A more relevant leading indicator of stock market moves is a country’s performance versus investors’ expectations.
On that metric, the UK receives a cautious ‘thumbs up’. Unemployment rates, which many believed would rise significantly as a consequence of public spending cuts and weak growth, have remained relatively subdued.
Indeed, recent data shows the number of people in work has reached a record high. And, despite the dire prognostications of many forecasters, the economy returned to growth in the third quarter, albeit at a sluggish level.
This improving economic outlook, combined with a good reputation for corporate governance and ease of doing business, means that we are optimistic about the outlook for UK equities.
While cognisant of the usual US fiscal cliff/eurozone sovereign debt issues, we remain reasonably bullish. A string of positive updates from domestically-exposed UK companies, such as Sports Direct and William Hill, has enhanced this confidence. Although this year’s biggest hit may involve a Korean rapper and some ridiculous dance moves, it is 007 who currently sits atop the global box office.
Britain does not need to look back to yesterday; and although we do need to be aware of the taxman, we are on the long and winding road to recovery.
Neil Veitch is manager of the SVM UK Opportunities fund.
-Robust recent macroeconomic data allied with business-friendly government policy
-UK consumers showing signs of life as inflation concerns ease
-Eurozone worries/US fiscal cliff
-Consumer confidence fragile and susceptible to external shocks
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