The macro environment in the UK is quite interesting right now. The rise in real wages is being reflected in consumer confidence data and is a closely watched indicator for near-term demand. At the same time, it’s important to get the wages to more sustainable levels to keep a lid on inflation. That’s proving to be tricky. A recession might be necessary to conquer inflation.

Even so, there are some nascent signs of inflation showing some decline. The last print on services inflation showed a sharp decline. The change in price cap on energy utilities in October will also help reduce the headline inflation. But it doesn’t solve the end game. Food inflation is still high but has been declining rapidly with the pace varying a lot among different baskets.

Companies need to think about how disinflation can impact them even while there may be inflation in wages is quite a challenge. Understanding where a company stands in terms of pricing power in a disinflationary world is quite important. We try to hold a lot of discussions around this topic.

Given the high interest rate environment, we are keeping a close watch on highly indebted companies. The stock market is putting a sizeable discount on companies with high leverage. Analysing the liquidity profile, duration and other aspects of a company’s debt are crucial. Certain sectors such as real estate are more leveraged than others. There’s a lot of refinancing that needs to be done at uncomfortable levels. We just need to be patient here and watch the unfolding scenario.

Valuation is an important starting point in any discussion on investments in the UK. The UK has been under pressure for many years and outflows particularly accelerated around Brexit. The UK has faced political turbulence for many years, moving from one crisis to the other. The valuation right now is very cheap relative to our history and relative to other markets. The upward revision to GDP as well as the drop in CPI is helpful. If the trend could continue without the economy slipping into a deep recession, the trading environment for very cheap stocks will be good.

At the same time, we have an election coming up. The recent U-turn by Prime Minister Rishi Sunak on climate change is a distraction.

So, what’s likely to catalyse a change with regard to how investors view the UK? Confusion and politics in the UK have coexisted for so long that investors are looking for some stability and clarity in policy making. If it becomes clear that one party in particular is more likely to win a decent mandate by some distance, we may have more clarity on many issues including on net zero and taxation.

The value of active minds: independent thinking

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