Not a Trumpet Voluntary

Regular blog readers will be familiar with my more upbeat expectations for the UK economy and stock market. Indeed, close watchers will have noted my somewhat eccentric call that the UK equity market will outperform the S&P in 2025. This is a minority view, I will acknowledge, but its apparent ludicrousness is, in my opinion, what makes it more likely to be right.

Unsurprisingly, I have had a few questions about these non-consensus calls, with one comment describing me as a “perma-bull” on the UK. I have to admit to having had a more optimistic bent on the UK economy and market for some time, but I am by no means a perma-bull. Maybe it just feels like that because most commentators, economists, market watchers and the media have been and still are so overwhelmingly negative.

Sometimes, it’s really hard to be objective about the UK’s economic and market fundamentals simply because the background narrative is so depressing. The last few weeks have been no exception. The macro data hasn’t been altogether uplifting, especially in relation to sentiment surveys and government borrowing, and of course, the inflation data showed the anticipated pick up following the damaging measures announced in last October’s budget and the impact of base effects. Nevertheless, nothing I have seen undermines what I expect to happen through 2025 and into 2026.

In summary, I still expect to see robust employment data (basically, more people in work, working longer hours), another year of real wage growth, falling inflation through the latter part of the year after the temporary spike in the first half, higher government spending that will significantly contribute to overall economic growth, and arguably most significantly, three further cuts in interest rates.

I expect all these factors to combine to deliver growth in the domestic economy in the region of about 1.5% in 2025, increasing to over 2% in 2026 (before weird, unexplained volatility in trade data). If, as I suspect might happen, households respond to lower interest rates by reducing the currently high saving rate, then these numbers could even be exceeded. This positive surprise, for that is what it would be, would create a more favourable backdrop for the equity market, which will also be supported by falling rates, lower bond yields and, of course, by an extraordinarily low valuation.

All of this might appear to be wishful thinking on my part, but before dismissing my minority view as the mad ramblings of a delusional UK investor, I thought I should draw your attention to some interesting performance data I was looking at yesterday. As we approach the end of the second month of 2025, the following performance data might surprise those of you who don’t monitor this every day (as I do).

Clearly, it is early days, and I am very conscious of not drawing too many conclusions from short-term performance data, but the numbers do make for interesting reading. So far, the US has lagged other developed markets, including the UK, which has had a very decent start to the year. I am surprised by Europe’s very good performance, which I did not anticipate. The Hang Seng has performed very well, and the CSI 300 is flat on the year, but both these indices are up very significantly from last September’s low point just before the first package of stimulus measures was announced. Aside from the surprising performance of the Euro Stoxx, this is what I had expected, so please permit me to give a brief blow on a metaphorical trumpet.

Rest assured, I will not be getting carried away. There is a hell of a lot going on now geopolitically, which is both fascinating and challenging to quantify. However, nothing I have seen so far destabilises the important calls I made at the end of last year, which have, for the most part, played out as I had anticipated. I will continue to monitor all this activity very closely and keep you all informed about what I believe the implications of these important and rapidly changing events are likely to be.