Fears of a double-dip recession in the UK are significantly overdone, with the budget deficit not as big a threat to growth as the consensus assumes, says John White, head of UK equities at GLG.
White says that, while the deficit remains large enough to cause serious concern, it is significantly better – and more pro-cyclical in nature – than the market currently believes.
“All the focus is on a double dip recession,” he says. “But we think the probability of that is extremely low. The deficit, although large, is better than expected. The 2009 consensus forecast was £185bn but it came in at £155bn. And deficits are very pro-cyclical; they get materially better as the interest cost of the burden decreases. I’m not sure the market has really understood that yet.”
Although he expects public sector spending cuts to be “draconian”, White believes inflation will remain high, but the Bank of England will take the risk of keeping rates low. “That will boost growth and obviously provide another tailwind for the deficit,” he says.
Moreover, once markets digest that the Treasury will need to borrow significantly less than forecast, White says the UK economy could be viewed in an altogether more positive light. “As soon as the market begins to realise that gilt issuance is not going to be £180bn over the next 12 months, but more like £140bn or £130bn, then the whole mindset around the economy and sterling – and assets more broadly – could change quite dramatically,” he says.
With the market pricing in a double-dip recession, White is bullish on UK equities, pointing out that consumer and corporate balance sheets are robust and valuations compelling. “Our earnings forecasts suggest the UK equity market is about as cheap as it’s ever been,” he says. “People get caught up with what’s happening in Greece, Hungary and Spain, but these stories are very, very different to the UK situation.”
A key theme in the UK market this year will be M&A, White believes, with increasing numbers of companies seeking rapid – rather than organic – growth. “There’s definitely an appetite to grow — we think that’s a sign of both M&A and hiring,” he says. “The market will rerate companies that make good acquisitions in a way it might not reward organic growth in the near term. And with US corporates looking increasingly at the UK market for acquisitions, we suspect the second half of 2010 will be pretty active for M&A bankers.”