For traders and analysts, conventional wisdom is a dangerous thing. Sometimes widely held beliefs and perceptions really are accurate. However, the fact that everyone believes something doesn’t, in itself, make it true. That may seem like an obvious thing to say but allowing -- or forcing -- yourself to challenge an assumption that everyone is making is extremely difficult. We naturally base our views on what we hear from others and don’t want to be the one to question their beliefs and hurt their feelings: it is easier to just go along with them. That is what I have found over the last couple of years when talking to family and friends about the economic situation in the UK.
They have uniformly told me that the UK was failing economically. Nor was that, as it almost always is here in America, a partisan thing. I have family and friends on both sides of the political divide over there, but while they might disagree on why it was true, there was never any doubt in their mind that the country was on the verge of economic collapse. They maintain that the country was too slow to remove pandemic-related restrictions, and that therefore the UK was slower than others to get going again. That, they say, put them so far behind that they were caught in a downward spiral in what they saw as the zero sum game of international economics.
The thing is, though, neither logic nor evidence supported that contention much, if at all. Logically, the global economy is not a one-sized pie that is divided up amongst nations. Relative strength within it is not a zero sum game at all. The world’s economy grows, and each country expands or contracts on its own. Slower growth than others, however, is still growth.
From an evidential perspective, yes, the UK, because their Covid restrictions were harsher and lasted longer than those in America, was a bit slower to bounce back than we were here. However, there were signs that their recovery was roughly on a par with most of their European neighbors and that they have continued to recover even as the U.S. has slowed again. That has become even more evident as the data has been revised, as this Bloomberg article points out, but it could also be seen in the relative stock market performances before those revisions.
The above is a comparative, one year chart for two ETFs: EWU, a UK stock index fund, and SPY, which tracks the S&P 500 here in the States. As you can see, EWU has significantly outperformed over that time, even as everyone I spoke to there was convinced that they were sinking fast.
And yet now that the numbers are being revised and the real picture is becoming clear, there are those who are saying now is a good time to buy UK stocks, and if you listen to a number of “ordinary people” in England, you would think that to be the case. They are much more optimistic now than they have been for a while. The irony, though, is that from an investing perspective, the time to buy EWU was a year ago, when everyone was convinced that the sky was falling. Right now, the national mood in the UK might be better, but the prospects certainly aren’t.
Ratings agency S&P has just published their regular “Economic Outlook” for the country, in which they conclude that the economy is “close to stagnation.” Growth is slowing again, and the unemployment rate is ticking upwards. And yet inflation is still running at 6.7%. While yes, that is a big improvement on roughly 10% inflation that was causing so much pain a year or so ago, it is still high enough to, when coupled with rising unemployment, raise fears of the dreaded “stagflation.”
Add in an election that will be held next year. Usually, a Conservative Party election win is seen as good for the market and a Labour Party win as bad. The problem now is the Conservatives have controlled Parliament and the Prime Minister’s office for thirteen years and have to take some of the blame for the possibility of stagflation. So, who does the market prefer: the Labour Party who are seen as anti-business, or the Conservatives, who have shown that they are inept? Either way, the election probably won’t help UK stocks.
The long and short of it here is that conventional wisdom about the UK economy has been wrong for a while and is now wrong again as it has swung to a more positive note. That is why, even as there are people saying that investing there to hide from the current weakness in U.S. market is a good idea, selling out of UK stocks or avoiding them if you have none looks like the smart move for now.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.