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In this edition of your investment themes Alpine Macro sets out the reasons behind the resurgence in UK inflation, and BCA Research says among the major economies, the most vulnerable to a deep recession is the UK.
Meanwhile, Bank of America’s Michael Hartnett provides context on positioning, flows and returns in his The Flow Show report, and questions whether anyone has heard anyone say anything good about the UK recently, Heteronomics warns high living costs are becoming increasingly problematic for the UK Conservative Party, and Capital Economics highlights banks’ exposure to commercial property debt has hit six-year high.
Alpine Macro: A word on the UK (June 27)
While inflation rates vary from country to country, they have fallen across the high-income economies, except in the UK says Chen Zhao at Alpine Macro. He says there could be many reasons behind the resurgence in UK inflation, including, a wage-inflation spiral, low productivity growth, multiple commodity shocks, the Ukraine war, and the fact the Bank of England has been much less restrictive than the Fed. All of this means that the BoE needs to tighten much more, says Zhao. This would suggest that UK stocks will underperform their US counterparts, while gilt prices will be under pressure, he says. Sterling should strengthen against both the US dollar and euro on expectations of a much more hawkish BoE than either the Fed or ECB, adds Zhao. Click here for the full report. Click here if you would like to speak to the analyst.
BCA Research: The inflation expectations time bomb; UK requires a massive mean reversal (June 28)
Very few people grasp that if central banks want to prevent inflation expectations from un-anchoring, they must make inflation undershoot 2 percent for some time, according to BCA Research. In the US and euro area, inflation needs to stabilise at around 1 percent; and in the UK, closer to 0 percent, says the firm. BCA says it remains cyclically positioned for a global economic downturn, as the market does not grasp the implied depth of the recession that will be needed to prevent inflation expectations from un-anchoring. Among the major economies, the firm says the most vulnerable to a deep recession is the UK, which must experience negligible inflation in the coming years if it is to prevent inflation expectations from un-anchoring. Click here for the full report. Click here if you would like to speak to the analyst.
Bank of America: The Flow Show; In a for a penny in for a pound (June 22)
In the most recent note from Michael Hartnett at Bank of America Global Research, there’s a good summary of recent flows, and YTD flows, an update of BofA’s bull & bear indicator (declining), good and bad price action, and a section on UK assets, appropriately titled ”Buy Humiliation”, in which he questions whether anyone has heard anyone say anything good about the UK recently. That makes equities and bonds a good buy. Click here if you would like to speak to the analyst.
Heteronomics: UK – desperate policies for disinflation (June 27)
High living costs are becoming increasingly problematic for the UK Conservative Party, which had been happy to paper over costly policies by stoking nominal value growth, says Philip Rush at Heteronomics. Monetary medicine is a bitter pill that can only have its most acute side effects treated through forbearance, he says, and blaming profiteering doesn’t help fix the problem. Ending trends from the pension triple-lock, proportional living wage hikes, and new environmental fees would help, says Rush. However, the government has probably lost the next election already, he says. Click here for the full report. Click here if you would like to speak to the analyst.
Capital Economics: Banks’ exposure to commercial property debt hits six-year high (June 29)
The share of outstanding debt secured on UK commercial property has risen from 6.7% in September of last year to 7.1%, a six-year high, according to Capital Economics. However, that is still a long way off the 12% share seen in the run up to the GFC, says the firm. The rise in net lending may reflect increasing investor confidence that capital values have stabilised, and the time is right to look for bargains, says Capital. Indeed, all-property capital values have seen no change since February, note the firm. But these data precede the step up in gilt yields that followed worse-than-expected inflation data, says Capital. That means a further rise in property yields is warranted, and capital values are likely to come under further downward pressure this year, says the firm. Alongside a recession that Capital still expects later this year, investment and lending is set to remain subdued for some time yet. Click here for the full report. Click here if you would like to speak to the analyst.
