Is the UK on the verge of a bull market?


    With the UK economy having just recently re-emerged from recession, investors would be forgiven for losing confidence in home-grown equities.

    Schroders’ Richard Buxton is in that camp. “From a 22x [price-to-earnings] multiple 10 years ago, you would have struggled to make money from investing in equities even if the macroeconomic environment had been much better.

    “If history is any guide, then from today’s valuations – a p/e multiple of 11x – the next 10 years should provide positive real returns for investors, possibly double-digit per year, in spite of the economic headwinds we face. I am much more optimistic about the returns from UK equities over the coming decade than I was 10 years ago.”

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    From the start of 2012 to November 29, the FTSE All-Share index returned 11.25 per cent, which Colin Morton, manager of the Franklin UK Blue Chip fund, says will be a surprise to most.

    John Greenwood, chief economist at Invesco Perpetual, however, disagrees with the opinion that the UK economy will significantly improve next year or that the UK stockmarket is on the verge of turning from bear to bull.

    He explains: “To use Mervyn King’s phrase, I think the economy will continue to zig and zag. I do not think that we are at the start of a new surge in growth just because we had one quarter of good figures in the third quarter. The underlying problem is the repair of balance sheets.

    “Britain went into this whole downturn with more leveraged banks, more leveraged consumers and a government that had run deficits for six or seven years in good times, so that there was no cash in the till to put into stimulus programmes in the recovery. I do not think, and have never thought, that this was going to be a quick recovery, and I think we are going to see more of this slow, gradual improvement.”

    He adds that, in his opinion, the most important job for the government now is to get a grip on the inflation rate which “eroded consumer incomes and caused the economy to be weakened in 2011 and the early part of 2012”.

    He adds, however: “Having said all that, I think that the growth outlook is going to be slightly better than it has been in the past year or so, but, in this environment of slow balance-sheet repair, I am not looking for a sudden surge in growth or a sudden boost to liquidity. Those things are not going to happen in this environment.”

    This year has seen the Bank of England’s Monetary Policy Committee keep the base rate at 0.5 per cent and boost its quantitative easing programme twice, by £50bn in February and then again by the same amount in July.

    Robert Talbut, chief investment officer at Royal London Asset Management, doesn’t discount further expansionary measures from the bank. “I see it as far from inconceivable that if growth disappoints further, then the monetary authorities will have to become even more expansionary even to the extent of finding a way to support government growth initiatives,” he says.