UK equities will “turn a corner” in 2024 as analysts bet that growing optimism about the UK’s economic prospects would help it perform better relative to global peers.
In the US the S&P 500 gained 25 per cent in 2023 while the tech-heavy Nasdaq jumped around 45 per cent.
But analysts were hopeful that UK equities would put in a much stronger performance, largely thanks to the surprisingly swift fall in inflation in the last quarter of 2023.
“Inflation should drop materially helped by stronger currency and lower energy prices,” Charles Hall, head of research at Peel Hunt said. “This, combined with lower rate expectations, should drive enhanced confidence in economic performance,” he continued.
Joachim Klement, investment strategist at Liberum, argued that a steadily improving economy would help support corporate earnings. With an improving economy, the UK’s relatively cheap assets will start to look ever more attractive to international investors.
“This should support a re-rating for UK equities,” Klement said. He predicted that UK equities would show returns in the high single digits in 2024, roughly in line with the US.
Diana Iovanel, markets economist at Capital Economics, also predicted that UK equities would post a “strong showing” in 2024, albeit for different reasons.
She argued that the Bank of England would be forced to cut rates more aggressively than other central banks, which would see the pound weaken to around $1.20. Sterling is currently worth around $1.27.
A weaker pound would support many of the FTSE 100’s largest companies which make a large portion of their earnings overseas. “We think UK equities will turn the corner in 2024,” she said.
Iovanel also argued that continued enthusiasm around AI would boost UK equities in 2024.
“When potentially transformative technologies emerge, enthusiasm in the markets tends to be quite long-lived and broaden to the rest of the stock market and to equities in other countries,” she said.
“We expect this to boost equity valuations in the UK too,” she added, although less than in the US. She forecast the MSCI UK index to rise around 15 per cent in 2024.
Looking over the longer term, both Hall and Klement were fairly bullish on the prospects of further gains.
Klement thought that the “potential triggers” of falling interest rates and declining inflation meant UK equities could expect returns “several percentage points” above the US over the next three to ten years.
Hall meanwhile argued that the biggest driver for the performance of UK equities over the medium term was a chance in investor appetite. “Government could be a driver through introducing a British ISA, improving tax incentives or encouraging pension funds to increase risk assets and UK weighting,” he said.