Important information: The value of investments and the income from them, can go down as well as up, so you may get back less than you invest.
A pattern has emerged from the last few UK gross domestic product (GDP) figures. Underlying the headline-grabbing bad news, there’s been an inkling of good news too.
So, let’s start with the good. The UK has avoided a double-dip recession due to a rebound in food and accommodation services after the second nationwide lockdown was lifted early in December. That led to a 1% rise in GDP over the final three months of 2020. This was marginally better than expected, demonstrating how businesses have adapted to lockdowns and how November’s measures were looser than the Spring’s.
Then there’s the bad. Over 2020 as a whole, GDP shrunk by 9.9%. That’s the worst fall since GDP was first counted in the aftermath of the Second World War. It had never before dropped more than 4.1% in a year. Modelling GDP further back, this could be the worst fall since 1709. The UK also lagged the other G7 countries for which 2020 Q4 data are available.
All this is likely to have a bearing on Rishi Sunak’s 3rd March Budget. Rumoured measures to withdraw support for the economy have been overtaken by events. In response to today’s figures, the chancellor said his “focus remains fixed on doing everything we can to protect jobs, businesses and livelihoods.” With no clear end-date in sight, output could fall a further 4%.
This does all sound pretty bad. But it’s also not much of a surprise. At any other time, headlines like this would inspire panic. But after a year in which the extraordinary has become commonplace, investors reacted to today’s figures with little more than an upward inflection of the eyebrow.
Trace the FTSE 100 this morning, and you can map their thoughts. The index fell slightly when the extent of 2020’s contraction piqued people’s curiosity. Within little more than an hour, it had already made up all its losses.
This disparity between alarming economic reality and market indifference reminds us that GDP figures are inherently backward looking, while markets keep their gaze unerringly forward.
Investors are far more interested in what’s going to happen in the future, about which retrospective GDP figures tell little. For that, there’s plenty else to occupy their attention.
First and foremost in their minds will be the vaccine rollout. It still feels naïve to say that vaccines are the answers to all our problems, but it’s becoming ever clearer that growth won’t be assured until lockdowns are gone for good.
Expectations are high for a swift bounce back once populations are vaccinated. Andy Haldane, the Bank of England's chief economist, yesterday described the economy as a "coiled spring" ready to release its "pent-up financial energy".
Fortunately, on the vaccine front, the UK appears to be in good shape. Britain has vaccinated more people than any other European country. Proportionately, we’re third in the global race behind Israel and the UAE.
There are more encouraging signs of life in our otherwise dormant economy. For international investors, the UK has long looked like a basket case. They’ve been put off our shores by damning headlines dominated by Brexit. News like today’s certainly won’t encourage them back.
But with the UK now widely overlooked, there’s a steadily mounting valuation argument in favour of our market. For the contrarian investor, today could be an opportunity to buy.
The UK should also do particularly well from a bounce back in activity. Where our overexposure to cyclicals and underexposure to tech hurt us last year, it’s the former which should benefit most from a reopened economy. My colleague, Tom Stevenson, looked in more detail at the UK’s trajectory yesterday.
As ever, then, there’s more going on than the headlines suggest. Precisely because few of us read the full story, this could be an interesting time to invest in the UK.
Important information: Investors should note that the views expressed may no longer be current and may have already been acted upon. This information is not a personal recommendation for any particular investment. If you are unsure about the suitability of an investment you should speak to an authorised financial adviser.
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