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Quietly, the UK FTSE All-Share market is around 5% ahead of the US so far this year. And it is now around 20% ahead of the US S&P 500 since the start of 2024. Lower valuations and lower expectations are finally starting to help UK investors. And although the UK stock market is different from the UK economy there is some better news there too. This week’s UK composite PMI survey number came in at healthy 53.7 which is consistent with solid economic growth and is at the highs since Labour came into power. The hope is that UK GDP does actually follow this survey data higher in 2026.
And stronger UK growth should coincide with lower UK interest rates. After a dovish Bank of England meeting yesterday, the market currently expects base rates to fall from 3.75% today to the 3.25%-3.50% range by the summer. I think there is a good chance we will ultimately end up lower. Part of the reason for this is that I continue to be a UK inflation optimist. Much of the pressure on UK inflation has come from wage inflation in the services sector. But here a softening labour market is doing its job to lower wages and we may already be at the 3% or so private sector wage inflation that is consistent with a 2% inflation target.
Higher interest rates are one reason for a slowing jobs market. Another, I think, is the ongoing impact of AI slowing the demand for new entry-level workers. It is worth noting that this might disproportionately affect the UK jobs market as AI improvements particularly help the services sector which is a larger part of the UK economy. Some of this impact is starting show up in the data. As an example, here is a Morgan Stanley’s estimate of the impact of AI improvements on hiring, and you can see it is the UK that is most impacted:
So we have the cocktail of an improving economy and lower interest rates but a soft and uncertain jobs market. This is not great if you are looking for a job (and especially if you are a new graduate looking for your first job). But as an equity investor it is actually pretty friendly. The flipside of slower hiring is better productivity for those that do have a job. And increasing worker efficiency, better growth and lower rates should be good news for profit growth.
This backdrop also makes me inclined to think about some of the more contrarian, unloved UK opportunities that are still out there. And I am not sure there is anything more unloved by investors today than the UK office market. There is very little new office development going on even as net leasing rates are as high as they have been in at least 10 years:
Rising demand combined with supply that is pretty fixed in the short term should mean those assets trade at a premium. Instead, many REITs still trade at large discounts, in part because of concerns over their office exposure (see below). If this week’s survey is right and the economy starts to pick up then I think this sort of asset is worth looking at again.
Chris Brown, CIO
cbrown@ipscap.com
The value of investments may fall as well as rise and you may not get back all capital invested. Past Performance is not a guide to future performance and should not be relied upon. Nothing in this market commentary should be read as or constitutes investment advice.
