UK stocks stage biggest rally since early January after inflation drops

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UK stocks this week staged their biggest rally since early January, as investors warmed to a market that has missed out on global gains this year. 

A bigger than expected drop in UK inflation in June helped London’s FTSE All-Share index rise 3.1 per cent in the week to Friday, its best run since notching a 3.3 per cent gain in the first week of the year, according to Bloomberg data. 

Property groups and housebuilders were among the biggest winners, with Persimmon, Barratt Developments and Taylor Wimpey all rising more than 10 per cent over the week as tentative signs of cooling price growth left traders scaling back their expectations of where interest rates might peak.

The FTSE 100 eked out a modest 1 per cent gain last year and hit a record high in February. However, the index has lagged far behind those in Europe and the US in 2023. New York’s benchmark S&P 500 and Europe’s region-wide Stoxx 600 have climbed 18 per cent and 9.3 per cent, respectively, since January, compared with the FTSE 100’s 2 per cent rise. 

But some argue that UK stocks suddenly have the wind at their backs.

“I wonder whether we’ll look back at that June [inflation] print and think that was the day, that was the catalyst for a turn,” said Neil Birrell, chief investment officer at Premier Miton.

The UK stock market is cheap, whether by international or historical standards, Birrell said. “Companies here are 20 to 30 per cent cheaper than their rivals overseas but they are not 20 to 30 per cent worse,” he said. “Yes, there’s a malaise hanging over the UK, but I think it’s got to a stage now where the out-and-out value that exists here in the stock market is at a level that’s not been seen before.”

Becky Qin, multi-asset investor at Fidelity International, said she too was attracted by the prices on offer in the UK. “Valuation is truly quite cheap, we are happier to own UK large cap versus continental Europe or the US on valuation grounds,” she said. 

Roger Lee, head of UK equity strategy at Investec, said: “Inflation falling below 8 per cent after months of higher than expected reports was psychologically important. It suggests the UK isn’t suffering some sort of exceptional, structural inflation problem relative to the rest of the world. Now is the time to buy UK plc.”

Others argued that the UK remained a value trap for investors. Fund manager Nick Train said last week that UK equities were “abysmally” out of favour and could stay “frustratingly cheap for a very long time”. 

Data suggests his claims have merit. UK equities have yet to enjoy a single week of inflows so far this year, according to Barclays, while the latest Bank of America global fund manager survey showed a net 21 per cent of investors remain underweight the UK. Sonja Laud, chief investment officer at Legal & General Investment Management, told the Financial Times the UK was on track to slip into a recession that will weigh on equities. 

Birrell was less concerned. “There probably will be a recession, but unless it’s a really deep one it may not matter,” he said. A potential uptick in mergers and acquisitions worried him more. “Our fund managers don’t want too many takeovers. You don’t get the chance to make money if others start picking off companies doing well.”

Additional reporting by Mary McDougall in London