UK recovery still sluggish


Tom Stevenson - Fidelity Personal Investing

11 September 2018

The Bank of England probably feels vindicated in its decision to raise interest rates by a quarter point last month. GDP growth of 0.6% a quarter and wages growing at 2.9% (excluding bonuses) suggest that recovery is at last underway.

But no-one should get terribly excited about what remains a pretty anaemic rate of improvement. The earnings growth rate including bonuses was a more subdued 2.6%. And with inflation running at 2.5% in July, that means families are barely keeping pace with rising prices. Ten years after the collapse of Lehman Brothers, we are still feeling the effects of the financial crisis.

On the one hand, the employment situation is clearly much healthier. The unemployment rate of just 4% is as low as it has been since 1975. You would have to be pretty close to the end of your career to remember a time when jobs were as plentiful.

But the feed through of a buoyant jobs market into higher, inflation-adjusted wages is just not happening. On this basis (the only one that really matters) the average wage is still lower than it was in 2008.

That reflects a persistent problem with productivity. Companies can only afford to pay their workers more in real terms if they are, on average, delivering more output. For reasons which remain something of a mystery to economists, we are failing to do that as a country.

So, anyone that thinks today’s modest rise in wage growth might lead to another interest rate hike anytime soon should probably think again. The Bank of England will look at the still enormous uncertainty surrounding Brexit and err on the side of caution for at least the next six months.

The pound edged higher on this morning’s news, and the slightly improved prospect of a deal with the EU, but there is little expectation of sterling recovering its pre-referendum level, or even the $1.40 hit earlier this year, anytime soon.

From an investor’s point of view, the outlook for the UK economy continues to cast a shadow over UK-facing stocks. Domestically-focused sectors like banking and retail will remain under the cosh.

This does not, of course, mean that investors should not consider investing in UK-listed shares. An international market like London is home to many companies that are domiciled and list their shares here but generate the lion’s share of their revenues and profits overseas.

When I spoke recently to Leigh Himsworth, manager of the Fidelity UK Opportunities Fund, he told me how he was positioning his portfolio to reflect this divide. He holds no banks, preferring to get his financials exposure via international businesses like Prudential rather than a UK-consumer-exposed bank like Lloyds

When it comes to retail, rather than invest in the High Street he is backing online specialists like ASOS. In the leisure sector, he likes the euro-denominated earnings of Wizz Air. Food producers like Cranswick and Dairy Crest find a place in his portfolio thanks to the fact that their competitors price their products in euros and are, therefore, less competitive in a weak sterling environment.

It is also the case that a relatively weak pound is good news for the export-heavy FTSE 100. And UK shares are well-supported by a decent dividend income, around 4% for the blue-chip index as a whole.

That relatively high and sustainable income will continue to look attractive to savers and investors if interest rates do rise at only a glacial pace. Outside of the US, where monetary tightening looks more entrenched, rates look like staying lower for longer.

The UK category of the Select 50 includes a number of income-focused funds that are designed to tap into this type of dividend-paying stock. These include: the Fidelity Enhanced Income Fund, Franklin Templeton’s UK Equity Income Fund and the JOHCM UK Equity Income Fund.

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