UK interest rates have started to come down, potentially lifting otherwise flat economic growth. But this won’t last if inflation proves sticky, and interest rates may even have to be raised again. In these uncertain times, it can be hard to find investment opportunities. But CT Global Managed Portfolio Trust believe UK equities offer great long-term value for the patient investor.
Key takeaways:
- The UK has been navigating a cautious economic recovery, with slow growth and sticky inflation
- If interest rates stay higher for longer to tackle inflation, further meaningful recovery may be delayed
- But there are opportunities for patient investors as the UK offers great value with robust fundamentals, particularly in small-cap equities
UK investors have faced a challenging few years. Inflation soared to 11%, its highest level in 40 years, before the economy fell into a shallow recession partly thanks to hiked up interest rates.
Almost everyone had less money in their pockets, and growth was slow. UK investors struggled to identify attractive opportunities.
The economy has since been navigating a cautious recovery that’s seen inflation fall to under 3% and interest rates reduce to 4.75%, with further cuts penciled in. But stubborn inflation poses a risk to these possible cuts as policymakers won’t want to lower rates unless inflation has been tamed. Political uncertainty in the US is giving weight to these inflationary fears as some of the new President’s proposed policies could see inflation rise again. This low-growth and uncertain environment is challenging, but we think there are long-term investment opportunities for the patient UK investor.
Higher for longer
UK interest rates began to increase in 2021 to address rising inflation. Interest rates influence how much we spend, and our spending influences how businesses set their prices. If consumers are paying more for their mortgage (for example), it means they’re spending less on other things. Businesses may then be less willing to raise their prices which don’t go up as quickly, ultimately lessening inflation. Interest rates are a very important tool when it comes to managing inflation, and the two variables have a closely tied economic relationship.
After inflationary pressures began to ease, the Bank of England made its first rate cut in August 2024 and another in November, from 5.25% down to 4.75%, with further cuts scheduled for 2025. But if inflation proves stickier than hoped, the Bank of England will be forced to reconsider any further reductions and may even need to increase rates again.
The UK economy is also vulnerable to the threat of US inflation. Some of the new President Donald Trump’s proposed policies are inflationary, so there’s concern around which will be enacted. Trade tariffs, in particular, have an inflationary impact as goods would now need to be manufactured in the US (instead of abroad), using the strong US dollar. Cost of goods would then be higher, pushing up inflation. That means trade tariffs could potentially slow down the pace of cuts in the US, ultimately slowing down the pace of cuts in the UK.
If rates do stay higher for longer, we would see an adverse impact on consumer sentiment, and possibly a long period of flat UK growth. The emerging economic landscape is not as positive as it may have been a year ago. In this environment, it’s hard for investors to know where to look, but there are some long-term growth opportunities to be found.
Opportunities for UK investors
UK equities may not have had a particularly good run, but that doesn’t mean there isn’t opportunity for the patient investor. Sentiment was knocked by the Labour government’s first budget in October last year which led to a disappointing run for UK equity investors in the fourth quarter of 2024. Medium and small-sized companies were particularly affected, partly due to currency-related challenges.
At the moment, sterling is relatively weak, and that generally benefits FTSE 100-listed large companies who sell goods internationally as their goods now seem relatively cheap. Smaller and medium-sized companies, who are typically more domestically focussed, do not enjoy the same benefits of a weaker currency. This calls the strength of corporate profits and economic growth into question.
However, public sector pay rises mean wages are growing strongly in real terms. Consumers will begin to feel better off and that will translate into higher spending, boosting growth. Sterling will eventually strengthen.
We think the UK equity market currently offers great value, particularly compared with the US. CT Global Managed Portfolio Trust has a global mandate, so holds equities from all over the world, including the UK. Its UK exposure currently stands at 40% (in the income portfolio) and 34% (in the growth portfolio). The fund’s manager, Peter Hewitt, has confidence in investing in the UK over the long term, particularly in small and medium-sized companies which are currently trading very cheaply and offer great growth potential. He always keeps investing for growth in mind.
Buying assets with good fundamentals for a low price is crucial to the success of most diversified investment portfolios. These value stocks (a technical term describing a stock which trades at a lower price relative to its fundamentals) offer opportunity, but long-term success requires patience. Some cheap small-cap equities will take many years to turn around, and the delay can be challenging. Investors should prepare to sit on their hands and wait as the UK economic tide starts to turn, in the knowledge they hold robust stocks bought for a good price.
The UK as an opportunity
After a challenging few years for the UK economic landscape, there’s hope interest rates will start to fall meaningfully and growth may start to pick up. Inflation is currently the main threat to this conclusion, and some US policy uncertainties are heightening this danger. But the UK offers great value compared to other countries and its economic fundamentals are robust. The tide will eventually start to turn, bringing opportunity to those investors who bought small-cap value stocks when they were cheap and held on to them for years.
Investment risks
The value of your investments and any income from them can go down as well as up and you may not get back the original amount invested. Gearing is used for investment purposes to obtain, increase or reduce exposure to an asset, index or investment.
Issued by Columbia Threadneedle Management Limited and approved for distribution 05/02/25.
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