The UK Has a Better Story to Tell

0:00Andrew Sheets:Welcome to Thoughts on the Market. I'm Andrew Sheets, Global Head of Fixed Income Research at Morgan Stanley. Today, why the UK may need better PR. It's Friday, August 14th at 2 p.m. in London. The last decade has been rough for the United Kingdom. Brexit was a true economic earthquake, and the subsequent weakening of economic ties to mainland Europe, the UK's largest trading partner, made economic activity weaker and more complicated. Then COVID hit the economy hard. So did spiking energy prices when Russia invaded Ukraine. Political volatility has been high, with seven prime ministers in the last 10 years.

0:39Andrew Sheets:And at present, UK growth is weak, inflation is too high, and debt to GDP is rising. Moreover, in a post-COVID world that's increasingly driven by the profit and power of technology, including AI, the UK market seems almost stuck in another era. Of the 10 largest companies in the U.S. stock market, eight are in technology. In the U.K., none of the 20 largest companies are in tech. Safe to say, being downbeat on the prospects for the U.K. is one of the most consensus views that I encounter. But it can also be deceiving. Simple stories in the market rarely are. Let's start with the argument that U.K.

1:20Andrew Sheets:markets are boring, stagnant, and being left behind by their lack of technology. It's just not true. Through early August, the S &P 500 has returned 85 % over the prior five years. The U.K. market? It's returned 82%. And over the last 12 months, the performance of the U.K. and U.S. markets are also similar. In short, don't judge a book by its cover. The U.K.'s currency, meanwhile, shows no sign of global investors shunning the island. Over the last 10 years, the U.K. pound has actually gained value against the U.S. dollar, notable given how strong the performance of the U.S. economy and markets have been over that time.

1:58Andrew Sheets:And that's also pretty impressive relative to its peers. Over this same time frame, the value of the Japanese yen, the Brazilian real, the Indian rupee, and the Korean yuan have all fallen significantly. The U.K.'s currency, on a relative basis, has outperformed. Now, the U.K.'s growth is weak. Morgan Stanley forecasts growth of just 1 % this year versus a bit over 2 % for the United States. But it's notable just what sort of headwind the country has been dealing with. The U.K. household and corporate sectors are both increasing their savings rates and doing so at the same time. And more savings means less spending and economic activity.

2:37Andrew Sheets:To put some context around this, U.S. households are currently saving only about 3 % of their disposable income. In the U.K., it's over 9%. And so if that UK savings rate can just simply stop moving higher or even fall, well, it would represent a big support to growth going forward. But are we avoiding the big question, the fiscal question? After all, we at Morgan Stanley forecast that general UK government debt to GDP will be about 96 % this year, some of the highest levels since World War II. But this is a global market, and I do think that the relative picture matters. So when thinking about the UK's 96 % debt-to-GDP ratio, let's consider what the numbers are elsewhere.

3:22Andrew Sheets:That ratio is 120 % in China. It's 120 % in France. It's 125 % in the US. It's 138 % in Italy. And it's 208 % in Japan. And out of all of these countries, the UK is the only one where we think the government deficit is materially smaller in 2027 than it was in 2025. Also, year-to-date, 10-year bond yields in the U.K. have risen less than yields in the U.S. or Japan. A new U.K. prime minister does raise the potential for new policy, something investors will need to watch closely. The country remains sensitive to swings in global energy prices. Yet we think the underlying story is more nuanced and positive than often gets discussed.

4:06Andrew Sheets:Market performance has been bearing this out. And in many cases, the bar is low. Thank you, as always, for your time. If you find Thoughts of the Market useful, let us know by leaving a review wherever you listen, and also tell a friend or colleague about us today.

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