The latest GDP figures, for the fourth quarter of 2023, told many of us what we already knew: the UK economy is pretty stagnant. And with a 0.3% fall in the fourth quarter combined with a 0.1% fall in the third quarter, the UK is now technically in a recession.
Of course, not by much. And in fact, throughout 2023 as a whole (and not in the last six months), the economy actually grew by 0.1%.
But an annual growth of 0.1% is not a cause for enthusiasm either, just as a drop of approximately 0.4% is not a harbinger of doom. Either way, though, the issue is that Prime Minister Rishi Sunak's promise of economic growth is not being delivered. Basically, we are stuck.
What we need is a feel-good factor
A few weeks ago, I really wasn't sure it was time to make a bet on the economy and the London stock market. The US economy and stock market looked more attractive.
My argument then was that any economic stimulus would come on the other side of the general election due to take place in the next twelve months. Until then, the economy was treading water.
Now I'm not so sure. Don't get me wrong: America is still attractive. But one way or another, a new government is likely to provide some certainty and confidence that the trend of recent years could come to an end.
Put another way, commentators are talking about the similarities between now and 1997, when the Labor Party under Tony Blair won the general election. And yes, the two elections are really comparable.
But think about what happened after the election: a sharp rise in the feel-good factor, as people saw a government emboldened to act. Consider Gordon Brown's decision to make the Bank of England independent, for example, freeing it from political interference in setting interest rates.
Boom times over the Atlantic
Investors have hardly been enthusiastic about UK stocks in recent months. The Investment Association has been reporting net outflows from UK equity funds, with cash withdrawn being reinvested in bond funds and short-term money market funds.
The reason is not difficult to understand. Look at FTSE 100Five-year performance: In five years, it has increased only 6.8%. To save us the math, that's a compound annual growth rate of 1.7%, which is hardly stellar.
America? For five years, the broad base S&P 500 (a much more representative index than the Dow Jones Industrial Average) had increased just over 80%. That's a compound annual growth rate of 15.9%.
And again, to save you doing the math, that means the S&P 500 has outperformed the Footsie by more than nine times.
It's no surprise that once interest rates started rising, fund managers started switching from stocks to bond funds: they need quarter-on-quarter growth rates to report to their investors.
Where are the bargains
But, ironically, that's just what they could start to see in the coming months. As I said, this economic drift will not persist forever. And, frankly, it's hard to imagine that a change in government could make things worse.
Although, come to think of it, that's more or less exactly what happened when Boris Johnson was replaced by Liz Truss: the markets crashed spectacularly.
But we have more than just hope to rely on. The facts – and one in particular – also favor investors.
The UK stock market is cheap. He FTSE All-Share The index has a price-earnings ratio of 11.9. The FTSE 100, a price-earnings ratio of 10.8. The FTSE All-Share Financial Sector, which contains 256 companies, has a price-earnings ratio of 9.1. The FTSE All-Share Basic Materials sector (21 companies), 6.7. The energy sector (15 companies), 6.5.
And so on and so on. The US S&P 500? 22.8. The Dow Jones Industrial Average? 25.7.
1997, reduced
In short, I think we may have seen this movie before.
The next few months could well be torrid. But it won't take a massive shift in sentiment for the market to turn: when cheap markets encounter favorable conditions, sentiment changes very quickly. And elections – and changes in government – have a useful ability to generate that change in sentiment.
And with the price-earnings ratios mentioned above, I know where to look.
Take it from me.
