Oh happy day. English gyms, pubs and shops reopen on Monday. Restaurants are taking bookings. The domestically focused FTSE 250 index is hitting record highs. Buy-side analysts recommend that clients top up their holdings.
Much of the re-rating simply reflects liquidity. Governments and central banks have spent the past year hosing money into markets, companies and people’s pockets. The US S&P 500 index hit a fresh record this week and Japan’s Nikkei 225 is only a whisker off its February post-bubble high. Wherever you look — from narrowing US corporate high-yield spreads to bitcoin — new levels are being reached.
The case for the UK goes further. Stocks are relatively cheap, undercutting big eurozone peers whether measured by book value or earnings. UK companies are expected to lift profits by 50 per cent this year, second only to those in France. The average dividend yield of 3.3 per cent in the MSCI UK index beats European neighbours.
Comparisons also favour UK stocks. Britain’s woeful early response to the pandemic hit domestic markets hard, leaving more room for rebound. Households responded by squirrelling away money, at one point saving half their disposable income. Now, with more than half the adult population having received at least one dose of a Covid-19 vaccine, the time is ripe to use some of that money. Pent-up demand and the wherewithal to spend it — on flights, meals and fripperies — should fuel a rise in corporate earnings, providing the next leg up for stocks.
But outright optimism ignores large hurdles. Brexit and job uncertainty are two. Further out, higher corporate taxes will weigh on earnings. Currency fluctuations will hurt. Britain is a small island and companies — whether they sell energy, pills or shampoos — rely on overseas markets for three-quarters of income.
Even liquidity is not assured at a time when financial collapses such as Archegos and Greensill are delivering small shocks to the system. Prudent investors should heed the old advice of “sell in May and go away” — even if that means a holiday cottage in Cornwall rather than a prohibited trip abroad.
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