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CONTRIBUTORS

Richard Bullas

Co-Head, UK Equities, Martin Currie

We are increasingly optimistic on the UK economy. Over the last year we’ve talked extensively about our positivity for a UK domestic resurgence. We put our hands up to say that we were early in our optimism, with the recovery derailed in the second half of 2024 following the change of government and its accompanying budget. However, from where we stand now, there is growing confidence for many domestically focused small and mid-cap (SMid) companies.

  1. Recent economic data has been surprising on the upside: UK economic momentum has picked up, with economic growth and retail sales recently beating expectations.1

Citi Economic Surprise Index

Source: Bloomberg, as at 14 May 2025. The Citi Economic Surprise Indices measure data surprises relative to market expectations. A positive reading means that data releases have been stronger than expected and a negative reading means that data releases have been worse than expected.

  1. Falling Inflation: There is a disinflationary wave to come once near-term utility bills ease.2 Forecasts show inflation getting to the 2% target in early 2026.3

  2. Energy costs falling: Energy prices will be a major driver of inflation coming back to target. UK gas prices are down 40% from February highs, and the oil price is down 14% year to date.4

  3. Interest rates cuts: Markets are pricing more interest rate cuts; with the expectation the UK base rate will go down to 3.5% in a year’s time.4 We think this could go even further, as disinflationary pressures build.

  4. Housing/Mortgages: Regulation is easing and shorter-term gilt yields and swap rates are falling.5 This is a big positive for the UK housing market and with current mortgage rates falling, this has wider positive impacts across the economy.

  5. Solid UK Consumer: Savings rates at 12% are elevated compared to long term norms.6 Maybe the Bank of England cutting interest rates will release the brake. Consumer credit is at a 30-year low as a percentage of incomes,7 there is near record high employment, and we have almost two years of real wage growth at 1.5–2.0%.8

  6. Sterling: US Dollar weakness and pound strength is disinflationary.9 A positive for domestic companies, it's also a headwind for international companies translating into profits and cash.

  7. Tariffs & Trade: The UK is relatively well insulated given a small goods trading deficit.10 Furthermore, we have secured the first post ‘Liberation Day’ trade deal announcement with the US as well as India and Europe.

  8. Capital Flow: There are early signs of capital flowing out of the US and into Europe, and with UK valuations looking relatively attractive to other markets, we believe the UK could be a beneficiary.

  9. Valuations: Even after the recent turmoil, the UK market is trading at a 40% discount to the S&P.11 UK SMid companies are trading on historically low valuation multiples and attractive dividend yields.

FTSE 250 Index forward P/E ratio

Source: Bloomberg, as at 14 May 2025. Price-to-Earnings ratio, is a metric measuring the price of a stock relative to its earnings per share.

All the above lead us to believe that the prospects for UK SMid companies are improving. Recent updates from many domestic companies highlight the improving trading conditions, and we’ve seen a recent divergence in performance from large to mid-cap stocks.

Endnotes

  1. Source: Citi Economic Surprise Index, as at 14 May 2025.

  2. Source: Office for National Statistics (ONS), as at 21 May 2025.

  3. Source: Bank of England, as at 8 May 2025.

  4. Source: Bloomberg, as at 14 May 2025.

  5. Source: This is Money, as at 2 May 2025.

  6. Source: ONS, as at 28 March 2025.

  7. Source: House of Commons Library as at 13 March 2025.

  8. Source: ONS as at 17 December 2024.

  9. Source: Bloomberg, as at 14 May 2025.

  10. Source: ONS, as at 25 April 2025.

  11. Source: Bloomberg, as at 14 May 2025.
     

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