UK Equity Market in 2015
by George Hatjoullis
UK equities proved something of a disappointment (to me) in 2014. At best they may finish the year unchanged. It is hard to make a strong case for the markets to do much better in 2015. Political risk is likely to suppress interest. The May election is unusually difficult to predict. My best guess is that the Labour party will form the next government, probably with support from Greens, SNP and possibly even Lib-Dems. This is not an obviously a business friendly combination. However, even a Conservative party-led government has a dark cloud wrapped around the silver lining. Such a government may set us on the path towards a referendum on continued EU membership. This would extend the uncertainty further out (most likely to 2017). The ideal market outcome, I suspect, is a Conservative party victory with UKip getting no seats in parliament. This might allow a new Conservative party leadership to claim there is no need for a referendum. However, this seems an outside outcome. The political backdrop is not good.
The economic backdrop is somewhat better than the media would have us believe (the UK media love to downgrade the UK economy for some reason). The economy is chugging along at a moderate but sustainable pace. Unemployment is trending down and is lower than elsewhere in europe. Inflation is also low but this is consistent with global deflationary conditions. It is not a specifically UK problem. Indeed the UK has a predisposition to inflation which is likely to negate any true deflationary risk. Real wage growth is finally positive though nominal wage growth is alarmingly low. The other source of concern is the prevalence of zero hours contracts and part-time employment, which flatter the employment statistics. This suppresses earnings and creates consumer uncertainty. Nevertheless, the situation is genuinely better than elsewhere is the EU (as evidence, the net EU migration statistics). The economy is unlikely to be an obstacle to UK equities moving higher.
The 2014 performance has also been artificially suppressed by the presence of big capitalisation stocks that have had specific problems. BP, Tesco and other supermarkets, all the major banks etc have had specific issues independent of the UK economy. When one looks at the individual stock situations it is remarkable that the FTSE may still close unchanged on the year. Many of these problems are now behind market, so they should not suppress progress, although a rapid improvement may not be automatic.
Overall, it hard to get excited about UK equities, either way, based on fundamentals. The chart, however, is more encouraging. It is a monthly chart going back to 1997. The two previous tops, and the conditions that accompanied these tops, are clear and are not now present. The FTSE is sitting just below a new high and the technical conditions offer no obstacle to making a new high. Once achieved it is likely to progress some distance. My post, “Outlook for equities: S&P 500” published 18 April 2013, seems relevant and worth reading again in conjunction with this blog.
The FTSE has been remarkably resilient this month. It is clearly sensitive to the interest rate outlook (as shown by the performance today). It is not unreasonable to assume that interest rates will move very little this year. Inflation is not an issue and wages remain very low despite finally seeing some improvement. Big cap stocks clearly have much of the bad news behind them. The election remains the big uncertainty but as noted above even a Labour win has a silver lining. I am upgrading my expectation and see FTSE, and UK equities in general, as a top performer in 2015. New highs and rising.