Monday Macro – the UK big picture
Something a little different this week – we spin through some headline stats and views for the UK and its equities sector
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Given that most readers of this newsletter are UK-based, I thought it might be worth swerving out of my usual roundup of key market data, taking a deep dive into the UK economy and more specifically the UK market. Remember that the UK market – via the LSE Group and its benchmark indices the FTSE all, 100, 250, 350, and Small Cap – is very different than the UK economy. There is some crossover but nowhere near as much as most lay people think.
As you’re all inundated with lots of mass media reporting I thought I would present a quick summary of the key macroeconomic data, sans endless charts and with thanks to experts such as John Calverley at Tricio and the Morgan Stanley and SoGen macro teams who have informed this roundup of views:
· The economy is weak and getting weaker – housing is dragging down sentiment while interest rate rises are working their way through the system
· Core inflation is still high though there are some positive signs – declining headline inflation means that wages are now rising in line with prices so real wages no longer under pressure. That said the UK core inflation rate at over 6% is higher than most, though not all, peers. On a more technical, narrow level the recent inflation print was largely powered by the drag in services inflation which came from hotel prices and air fares. On the other hand Core services inflation is still running at 7% pa. According to Morgan Stanley – in the middle of the pack of banks in terms of views – they reckon the forecast headline inflation will average 7.4%Y in 2023 and 2.8%Y in 2024. They see core at 6.2%Y in 2023 and 3.3%Y in 2024, a mild move lower from their previous figures. Key drivers – food is a drag (down), energy a boost.
· Unemployment is rising, slowly – it dipped below 4% in recent years but is now back above 4% and heading up. Consensus numbers suggest an employment decline of around 170k on a 3M/3M basis which is lower than in earlier months. The jobless rate may stay unchanged at around 4.3% or maybe nudge a tiny bit higher.
· Wage growth is the key – and it’s still currently running at over 8% for average total weekly earnings pa. There is evidence that private sector wage inflation rates are slowing down although private sector wages that have been the major driver. Look for this number to head below 8% in the coming months.
· GDP growth is uncertain, but the UK might avoid a recession although many banks are projecting a 0.1%Q correction in the third quarter of 2023. On the downside its worth noting that PMIs remain below the neutral 50-mark. A good summary from Morgan Stanley is as follows: “the economy is simply losing momentum following a somewhat more robust 1H23, rather than outright contracting”.
My finger in the air guestimate is that the UK might, just might avoid a technical recession but it will still feel a lot like a recession to most fellow citizens.
Next up, is the UK stock market in aggregate. In this section, I’m going to rely in the first instance on macro data from the quant team at SocGen led by Andrew Lapthorne, via their Global Equity Market Arithmetic from October 9th (so a tiny bit out of date but accurate enough for our purposes).
In the first table below I’ve pulled together comparative data for the UK versus either the developed world or the World (inc emerging markets). The first few lines of the table show performance over periods ranging from one month to YTD. The UK market isn’t that far off the mark except for the YTD numbers.
The more interesting data is below that and shows either market price-to-earnings ratios or earnings growth numbers – mainly for the 2023 and 2024 years (as estimates. The two most obvious points to make are that the UK is dirt cheap on valuation measures but earnings per share growth is weak – that’s even true if you look at the UK market excluding energy and excluding financials. The big drag on earnings growth in 2023 is the financial sector.
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