Summer in the UK

For a lot of the summer, I like staying in the UK – roads and the tube can be quieter, the weather is (usually!) sunnier, and it is more conducive to driving out of London and doing more exploring on the weekends. In equity markets we have been staying closer to home as well within our European coverage, warming up to UK domestic exposure post recent elections. In the first chart here, we see the FTSE 250 index (MCX) has recently broken out from a multi-year downtrend relative to the Stoxx 600 index (SXXP). Recent growth and inflation data, the change in government, M&A and valuation all feel like supportive factors.

Growth data

The UK was the fastest growing economy in the G7 in H1, and has more growth momentum than the Eurozone, with UK GDP growing at twice the rate of Europe in Q2, with the latter really dragged down by a contracting German economy. UK economic surprise data has been outpacing Europe in recent months while this year UK Manufacturing PMIs (in white) have been standout relative to the Eurozone (in blue).

In both economies real wages are growing as inflation has fallen faster than nominal wages, but at a greater pace in the UK, which stacks up well even relative to the US.

Inflation data

?Inflation has been stickier in the UK than in Europe as seen by Citi’s inflation surprise indices (a positive reading means inflation has been higher than expected and vice versa for a negative reading). However, this is beginning to inflect, where the latest inflation report saw headline and core CPI come in lighter than expected.

Services CPI now sits roughly 40bps below the August Monetary Policy Report projections, opening the door for the BoE to be more dovish following their recent hawkish rate cut (although at Jackson Hole this week Governor Bailey definitely was not as dovish as Powell).

New government

Besides having greater certainty and stability over government post recent elections, importantly commentary by the new Labour government has demonstrated a willingness to work with the EU to try and improve the situation around trade, which has been a weight on the UK economy post Brexit. Things that the EU already have in place with other trading partners such as greater alignment and less bureaucracy around things like product certification and testing, as well as safety requirements, would be small but important steps to helping the flow of exports.

PM Starmer at recent public events has repeatedly referenced resetting the relationship with European partners. The FT reported in July that “British and EU politicians and officials would regularly get back in the room together on a scale not seen since Brexit negotiations”.

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M&A

The UK remains the top target in Europe and the second globally, in terms of inbound M&A attractiveness according to the M&A Research Centre at Bayes Business School survey from 2023. In recent months we have seen a stronger rebound off the lows compared to other regions – well illustrated by this next chart which looks at rolling 12-month aggregate M&A deal value as a percentage of market cap.

Valuation

While post Brexit it has been easy to suggest the UK is looking cheap, it does seem to have accelerated to the point where it warrants another look. On a sector neutral basis, relative P/Es have been making fresh lows.

On a relative Price to Book basis, it looks cheap considering the relative improvement in Return on Equity.

More simplistically, it has the most attractive combined dividend plus buyback yield relative to other major European countries and the US.

Conclusion

Global investors are warming up to UK domestic exposure again and we can see why. Yet it doesn’t feel crowded and has diversification benefits relative to places like the US when you think about political risk and index concentration risk. Finally, cheap valuation is being backed up by improving relative fundamentals. The risk is that government spending has been a meaningful driver of GDP growth of late, and plans are to cut back spending in the coming quarters, so we do need to see the consumer take up more of the slack and that is what I will be watching the closest, along with ongoing commentary out of the BoE.

Weekend at Bernie’s will take a break next week and returns in September.

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Bernie’s weekend eats – Bincho Yakitori, Brighton

On a recent weekend drive out of London we spent the day in Brighton where the kids love the arcades on the Pier and just being by the sea, after we all do a bit of shopping around “The Lanes”. But the main reason we drive down is to go to Bincho Yakitori, which has won the title of best restaurant in Brighton in years gone by from various sources, and for my money is one of the best and most special restaurants we have in the UK. Chef and owner Dave Miney learnt how to grill yakitori in Japan, and it is the only place in the UK which comes close to the standard you find in Japan. It has a very casual décor with dark tones, in the style of a typical Japanese izakaya, and it’s hard not to immediately smile as you enter the restaurant. The smell of grilled chicken fills the air, you hear the sound of food kissing the hot binchotan coals (considered by many chefs to be one of the best charcoals in the world given long cooking time, minimal smoke and consistent temperature) with catchy beats in the background, and you see a room filled with happy faces. There is a regular menu with daily specials - the food is for sharing and most of it is grilled over the binchotan. You can find all parts of the chicken including skin, wings, gizzards, hearts and I order all of it, but the pork belly is also a favourite for many and I love the grilled onigiri (rice ball glazed with soy sauce). There are several tasty salads and a bunch of other small dishes. In true izakaya style you’ll want to have some sake, beer or whisky to go with this and they have a good and varied selection. Worth the drive down to Brighton for this alone.

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