New forecasts on the UK economy and the near term path for sterling paint a rosy picture for investors, but pessimism on the domestic stock market continues, the Office for Budget Responsibility has said.
In the first Spring Statement, announced today, Chancellor Philip Hammond said the OBR found the UK economy has grown 1.7 per cent in 2017, compared to the previous forecast of 1.5 per cent announced in the Autumn Budget in November.
The UK GDP is set to grow 1.5 per cent between 2018 and 2019, up from 1.4 per cent from previous estimates.
At the time of the Chancellor’s speech, the FTSE100 was around 31 points lower than the market opening at 7,183 as attention shifted to the US and the shock departure of Secretary of State Rex Tillerson, which was revealed at the same time as the Spring Statement.
The OBR did not change its estimates on the UK economy in relation to Brexit. It revised up the short-term direction for sterling compared to November. It said the sterling effective exchange will be 3.9 per cent higher in the second quarter of 2018 compared to previous estimates.
However, it said much of the increase is related to the weakness of the dollar, against which sterling is now expected to be 7.8 per cent higher in the same quarter. The OBR also said on average sterling is still around 5 per cent below the level it reported in its pre-referendum forecast in March 2016.
At the time of writing, sterling buys $1.39.
For stocks, the OBR said investors may be more pessimistic about the future returns on UK assets.
It has revised down stock prices in the near term, but mostly because of to the recent market correction. However, equity prices in the FTSE All-Share index are expected to rise steadily from 2019 onward.
Hargreaves Lansdown senior analyst Laith Khalaf says the pessimism around the UK stock market is “overcooked”, despite retail investors pulling money out of UK funds.
He says: “Despite the upbeat tone from the Chancellor, the UK is clearly out of favour as an investment destination for both domestic and overseas investors.
“While there are clearly risks to the UK economy, the current bout of extreme pessimism towards the UK stock market looks overcooked. The UK is home to a diverse range of companies, many of whom pay a decent dividend, and it shouldn’t be ignored by investors looking for a home for their money.”
For other asset classes, AJ Bell investment director Russ Mould says bonds have reacted well to the Chancellor’s speech. He notes the yield on the 10-year gilt has fallen back below 1.50 per cent today, which is quite a decrease from February’s 1.65 per cent high.
Mould adds:“The OBR’s minor cuts to its estimates for inflation for 2018-19 and 2019-20, to 1.8 per cent and 1.9 per cent may help a little on [the bond] front, too, also giving the Bank of England breathing space when it comes to its latest interest rate decision next Thursday.”