Written by our Director of Equity Advisory, Jeremy McKeown, the HyperNormalTimes provides in-depth and considered long-term commentary on major macroeconomic and market-shaping themes.

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September 17, 2023

Former Sick Man of Europe Gets Shot in the Arm


We have a sick man on our hands, a man gravely ill; it will be a great misfortune if, one of these days, he slips through our hands, especially before the necessary arrangements are made. Tsar Nicolas 1st of Russia,1860, in reference to the fading Ottoman Empire.

The UK has been portrayed as the sick man of Europe since its “self-inflicted flirtation with economic suicide,” otherwise known as Brexit, seven years ago. The predicted immediate post-referendum economic decline didn’t materialise. Nonetheless, the “Brexit disaster” was blamed squarely for the UK’s below-average economic performance over the COVID lockdown. After the UK’s political meltdown during the second half of 2022, Brexit supporters conceded that the UK had mishandled the post-Brexit period, and commentators questioned if the country could still function as an independent nation-state. After all, the UK was the only major economy smaller today than in 2019. Or was it?

In fact, according to the UK’s Office for National Statistics (ONS), the UK economy surpassed this pre-COVID marker nearly two years ago, when it admitted two weeks ago that it had made errors in calculating the UK’s GDP. The UK was not the economic slouch or outlier of our popular narrative.

But does this matter for financial markets? The market is not the economy, and the economy is not the market. So what if the economy is 1.7% bigger than we first thought? (Or about £40bn, equal to the size of the 12th largest FTSE100 company). It doesn’t change anything. Or does it?

It doesn’t mean the Exchequer gets more tax revenue than previously thought, and it doesn’t mean that UK companies will increase their revenue guidance. However, the UK’s higher GDP number will feed through into quantitative screening models of global asset allocators. And with large passive flows increasingly driven by such allocators, this is hugely significant.

None other than Warren Buffet looks at a country’s market capitalisation to GDP as a parameter for taking geographical risk. With an MSCI developed markets index weighting of just 4% (down from 10% in 2000), the UK remains a top-six global economy. The MSCI-developed market index captures 85% of the world’s equity capitalisation, implying a pool of capital worth $68tn. So, a 1% increase in global allocations to the UK is worth $680bn (£535bn) or about 20% of the UK’s total current market cap, roughly equivalent to the top four FTSE 100 companies, Astra-Zeneca, Shell, HSBC and Unilever combined. Or 10 Arm Holdings.

If the world’s capital allocators nudged up their UK equity weightings over the next few years in the manner suggested, the impact would provide a tsunami of capital inflows, far exceeding any capital market reforms under current consideration. Indeed, the ongoing de-equitisation of the UK stock market, as illustrated by the exit of Smurfit Kappa to New York and the high level of UK share buyback activity, means that the price action will be more pronounced for those remaining equities left behind than it otherwise would be.

Meanwhile, with its automotive industry being beaten on value by the Chinese and for aspiration by Tesla, Germany is more widely referred to as the new “Sick Man of Europe.” The engine room of the postwar European economy has evolved a business model of making things with cheap Russian energy to export to China, which looks more strategically challenged by the day.

Even French bank BNP Paribas has been flagging the relative value of the UK market, arguing that a cheap pound, an attractive combination of sectors and the better-than-expected performance of the British economy makes the country attractive. Viktor Hjort said, “The outlook for UK equities is not bad at all. The FTSE is a value market. It has lots of energy and materials and a lot of banks. You can look at the oil price to see where energy is going.”


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