The major UK stock market, the FTSE 100, hit a record high in May. But that is where any other positive comparison with its global peers ends. The main index, once again dramatically underperformed the benchmark US S&P 500 (+23%) and other global indices like the German Dax (+20%). The US index was led by the megacap tech titans, something the UK is obviously lacking. The main UK index is still dominated by interest rate sensitive companies like banks, homeowners, and insurers. Add energy and utility sectors like oil majors and mining companies to the mix and it is not hard to see why there have been relatively disappointing gains.
That said, we have seen mildly changing perceptions about the UK’s investability, while election positivity outweighed result uncertainty for a time.  Falling inflation, an initial rate cut in August and the perception of UK stocks as a safe haven amid a couple of tech corrections in the US also featured. This does mean the UK index is cheap, with substantial value across UK equities.
GBP
Sterling was comfortably the best performing major currency versus the dollar in 2024, and some way ahead of the euro which was next best. A higher interest rate environment acted as support for the pound, even if there remain question marks about weakness in the underlying economy.
The high in cable made in late September at 1.3434 did presage eight consecutive weeks of selling into the US election. Â But on a broad trade-weighted basis against global currencies, the pound performed admirably through most of 2024. The mild year-long downtrend in EUR/GBP saw it drop to lows last seen in March 2022 and close to pre-Brexit referendum levels. Certainly, both the economic and political picture between the UK and Europe diverged to the benefit of sterling.
The Economy and Bank of England (BoE)
Despite all the UK political drama and uncertainty in 2024, the economy is forecast to grow by 0.9% over the year, according to Barclays, leaping from the 0.3% posted in 2023. However, momentum has faded recently, as uncertainty over the October budget weighed on sentiment, both for companies and consumers. Headline inflation fell from more than 10% in 2023 to below 2% in the twelve months to September 2024.
That helped the Bank of England cut interest rates for the first time in the summer. But the policy easing cycle proved more gradual than most of its central bank peers. Services inflation became the key driver for policy as wage growth has become unhelpfully sticky and too elevated for most rate setters on the MPC. Labour’s expansionary first budget since 2010 could also have inflationary consequences due to the government’s decision to direct around two-thirds of additional borrowing towards day-to-day public services spending, rather than investments.
2025 Outlook
The UK economy faces both structural and cyclical challenges in the new year. The former are well known headwinds and include low productivity and labour force participation. Fiscal pressures might also be an issue, though consumers still have excess savings that could be called on if some of the macroeconomic uncertainty clears. If that happens, investments may be supported, and activity pick up further during 2025.
A cheap and largely export-driven stock market should present opportunities. The magnitude of interest rate cuts by the Bank of England is unclear and a more cautious path is currently assumed. If activity does start to roll over and with it wage growth, then more policy easing than priced in by money markets could see the support for GBP fade as interest rates differentials narrow.