UK fortunes: what the experts think

 

UK fortunes: what the experts think

The FTSE 100 soared and the pound broke above $1.39 against the dollar for the first time in almost three years this week “as Britain hit a milestone in its vaccination programme”, Could this be a turning point for UK-related assets, which have “struggled” of late? Paul Dales of Capital Economics is a believer. He reckons markets globally will be “buoyed” by a combination of ultraloose monetary policy and economic recovery, but that Britain in particular could shine. “The UK’s more favourable valuations and its greater exposure to the sectors likely to benefit most from the recovery” suggests equities “will rebound more rapidly than elsewhere”. Sterling is also tipped for a further boost. According to forex strategist Kit Juckes of SocGen, recovery means “money is going to want to flow out of US dollars towards more interesting places”. Freed of two key hurdles (a Brexit no-deal and the threat of negative interest rates), sterling could well benefit – possibly rising to $1.45 this year.

A rising pound is normally a hindrance to the internationally flavoured FTSE 100, because so many of its constituents make their money in dollars. The difference now, is “massive” demand for commodities. Iron ore and copper prices have shot up 85% and 80% respectively as “China’s post-Covid recovery has gathered momentum” – a boon to London-listed miners BHP (now Britain’s most valuable company), Rio Tinto and Glencore, which have all announced bumper dividends. The momentum should continue. “A second wave of demand is expected as Joe Biden steps up US rebuilding spend.”

Let’s not get carried away,The pound is still below $1.40, which for decades was considered its “support level”. And, as of Wednesday, the FTSE 100 is still some 9.5% down on its pre-Covid level. Bulls might argue that this shows how appealingly cheap UK shares are. But there are dangers. Britain looks “a bit like an emerging market economy” in which investors “are willing to take a punt when the appetite for risk is strong”. That’s fine – until the mood changes. “Then the hot money can leave as quickly as it arrives.”

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