There has been no shortage of doomsayers when it comes to the UK in recent times. Its post-covid performance in terms of inflation and growth has been among the worst of the developed economies. The shenanigans around the Truss budget in the Autumn of last year did nothing improve the look of the UK on the world stage. However, if we embrace the old adage that “there are no bad assets, only bad prices” is it possible that UK assets are becoming attractive. We are at least starting to hear voices who support this view.

In a recent emailed note, cited by Bloomberg, Morgan Stanley strategists are prepared to at least dip a metaphorical toe in the Channel. “Investor pessimism towards the UK is currently high; however, sentiment could shift if inflation starts to subside,” They are not wildly bullish on large caps in the very short term but highlight the relative attractiveness of UK mid and small caps.

The chart below highlights the valuation discount of the FTSE 100 relative to both the Eurostoxx 50 and S&P 500. Clearly, there are differences in the types of company that comprise these different indices, nevertheless the “margin for error” in the UK stock market is undoubtedly greater.

The FT picked up on the theme in Alphaville citing the same Morgan Stanley research. “In the context of the last 20 years, UK equities and credit are the cheapest global asset classes we can find,”

https://www.ft.com/content/6b828faa-aba1-43cc-9073-c139c5c0f9f9

Our take is that while The Bank of England is continuing to talk tough on inflation, by the time the moment arrives when some of the more elevated calls for UK rates could actually manifest, both the growth and inflation regime could be very different than they are today. We remain unenthused about longer duration nominal bonds but locking in yields at the front of the curve does make sense.

The UK: Cheap or cheap for a reason

The Bank of England is in an unenviable position. It has to “do something” but it only has one thing it can do.

Oil Dynamics