A lot has been said by some commentators about Great Britain’s 7th placed finish and worst gold medal haul since Athens in 2004 at this year’s Olympics. However, the absolute weighting of golds on the ‘official’ table feels misguided given the often-infinitesimal margins between places on the podium. A total medal count of 65 should be celebrated, particularly with the knowledge that a few fractions of a second here and there, for a slightly higher conversion rate of silver and bronze could have seen ol Blighty1 within touching distance of the top three. With just 22% of medals turned into gold, the Brits had by far the worst conversion rate of all the countries placed above them, and in aggregate recorded more third or better finishes than anyone but the US and China. All this is to say that things are not quite as bad as they seem on first blush, and with a little more luck the outcome could have been considerably different.
In keeping with the Olympic theme, one thing the Brits will be happy about passing the baton on is political dysfunction. Since the 1 May election landslide, the new Labour government has assumed a position of stability that has long evaded UK governments, with a strong mandate which – it is hoped – can be exploited to reset the dial on the economy after a decade of underperformance. The same cannot be said for its neighbours on each side, with the US and EU descending or threatening to descend into varying degrees of political unrest, as populism takes centre stage after years of inflation and uncertainty following the pandemic.
The changing political outlook comes at an interesting juncture as markets come to terms with the end of the global tightening cycle and diverging fortunes across the macro landscape. Much like the medal table, the UK may be better positioned than many give it credit. It is the direction and speed of change which matters most for markets, and notably for the UK, its economy is now moving forward at more than twice the rate predicted at the start of the year. Growth of 0.7% in the first quarter was the fastest expansion in the G7 group of advanced economies, and this momentum continued through to Q2’s 0.6% figure. Productivity and corporate profits are rising, accompanied by strong, real wage growth. The GDP announcement is supported by equally promising news on inflation with the latest update showing headline price growth of just 2.2%. The most important change here was the 0.5% fall in the rate of service sector inflation, which came in well below expectations. Although still elevated at 5.2%, the direction of travel is now clearly down, and the month-on-month drop was the largest in more than 12 months. For context, elevated services inflation was one of the key reservations which resulted in the Monetary Policy committee’s 5-4 split decision on interest rates during its August meeting. Continued downward pressure here will likely set the stage for more aggressive cuts moving forward.
In contrast to the green shoots emerging from the UK, the US finds itself treading water in a confusing medley of economic data. After slowing markedly in Q1 to 0.4%, in the second quarter headline growth bounced back to pip the UK, up 0.7%, and its year-on-year rate of 2.9% looks robust.
More importantly for macro watchers, however, was the uptick in unemployment, which triggered the much heralded Sahm rule indicator of an imminent recession, following a big miss on payrolls (basically the Sahm rule suggests that a recession is underway when the three month moving average of the unemployment rate jumps by 0.5%). This came hot on the footsteps of a large drop in US factory output which briefly sparked calls for an emergency rate cut from some panicked sectors of the market. Calm was restored by a positive inflation update later in the week, which fell to 2.9%, however the jitters experienced so far this month, underpinned by a massive volatility spike, highlight the challenges faced by the world’s largest market.
All this would be much more palatable if not for the juxtaposition between the economy and the US equity market, as noted by Société Générale global head Andrew Lapthorne. “Once again we have the contradiction of an expensive US equity market expecting both strong EPS growth over the coming years yet accompanied by significant interest rate cuts to stave off recession,” he said. “Both cannot be right.”. On Friday’s show, Ian Lance (manager of Temple Bar) also discussed data that he thinks shows that the US market is at extreme levels of overvaluation – worth a watch if you have not seen it already.
In contrast, the UK finds itself on a different trajectory as rate cuts are driven by disinflation which has been steadily heading towards target, while fears of recession are (hopefully) in the rear-view mirror. As for the market, it remains priced as if it were still circling the drain. As Charles Montanaro from Montanaro UK Smaller Companies highlights, the opportunity represented by the current fundaments of small UK companies currently present some of the most attractively priced earnings in recent memory. After years of false starts and own goals, you do not need to look far for other managers singing the praises of UK equities at current prices. BlackRock Throgmorton’s Dan Whitestone believes that the historic selloff across the UK is a behaviour that represents a disconnect to the strong earnings reported by its companies and overlooks the improving fundamentals of the market.
It remains early days in the march to exit economic purgatory, which so far would be described as steady, rather than spectacular. However, as we have noted, it is the direction of travel which matters most, and in that regard, the UK is tracking quite swimmingly. Much like the Olympic medal table, it just pays to look a little closer to recognise this.
[1 editor’s note – the author is a New Zealander who also points out they won 10 gold medals despite a population less than a tenth of the size of Great Britain]
