

Market Analysis
Big investors are increasingly optimistic about a rebound in undervalued UK assets, buoyed by the Bank of England's decision to lower interest rates from a 16-year peak and the new British government's decisive election victory.
On Thursday, the BoE reduced rates by 0.25 percentage points to 5.0%, a move that market watchers had closely anticipated.
Money managers interpreted this as a sign that the UK's challenges with sluggish growth and high inflation might be easing, particularly as political instability seems to be waning.
Years of Brexit turmoil, frequent leadership changes under the former Conservative government, and ex-Prime Minister Liz Truss's problematic 2022 mini-Budget had left UK stocks undervalued and government bonds lagging behind their US counterparts.
Despite a 5-4 vote among BoE policymakers for the rate cut, reflecting ongoing debate over inflation control, the bank's upgraded economic growth projections were well-received by investors.
Seema Shah, Principal Asset Management’s chief global strategist, commented, "The rate cut combined with a more optimistic growth forecast should be seen as a clear positive for markets."
Bill Papadakis, macro strategist at Lombard Odier, noted that the UK's fiscal policy now appears more stable compared to recent crises, and the improved economic backdrop, with rising growth, is encouraging.
Papadakis, who became bullish on UK stocks around the time of former Prime Minister Rishi Sunak's election call in late May, believes any weakness in British markets observed recently is likely temporary.
Following the BoE’s decision, the pound briefly dropped to its lowest level in nearly a month but quickly recovered to trade about 0.7% lower at $1.2772. Two-year gilt yields, sensitive to BoE policy, fell by 11 basis points to 3.703%, while the FTSE 250 index fell 0.65% but remained near its highest level since early 2022.
BACK IN BUSINESS?
Investors have withdrawn funds from British equity markets for over two years, according to Lipper data.
Despite the FTSE 250’s recent 8% gain, matching Wall Street’s S&P 500, it remains significantly undervalued compared to its US counterpart.
However, international bond markets have shown increased interest in UK assets, with the benchmark 10-year gilt yield dropping almost a full percentage point this year to 3.874% as its price has risen.
While gilts continue to underperform compared to US Treasuries, they are beginning to attract more attention. Harry Richards from Jupiter Asset Management added UK government bonds to his funds for the first time since the 2008 financial crisis, citing expectations of falling inflation and undervalued long-dated gilts.
Richards predicts that international investors will return to UK debt markets.
"The Liz Truss debacle had deterred many foreign investors from UK fixed income," he said. "Now, international investors can feel more at ease."
CHAOS NO MORE
In July, Labour leader Keir Starmer secured a historic majority for his party after promising to revitalize the UK’s wealth and infrastructure.
Starmer and Finance Minister Rachel Reeves have committed to avoiding increased borrowing for daily expenditures despite inheriting a substantial national debt close to 100% of GDP.
Jason Simpson, fixed income strategist at State Street's SPDR ETF business, noted that this cautious approach is reassuring for the gilt markets. However, he also warned that bond investors remain wary of potential changes in tone.
Shamil Gohil from Fidelity International expressed optimism about UK gilts but highlighted Reeves' upcoming Budget in October as a key risk factor.
STERLING SHIMMERS
Short-term currency speculation reflects high optimism for the UK. Sterling is the top-performing currency against the US dollar this year, and traders are holding their largest ever derivatives bets on the pound's appreciation, according to US market regulator data.
The rate cut is unlikely to diminish sterling's appeal, as UK rates remain relatively high and the country's political, growth, and inflation prospects look promising, according to April LaRusse, head of investment specialists at Insight Investment.
"I don't see this as the start of a major reassessment of sterling. Overall, the UK appears quite attractive," she said.
Paraphrasing text from "Reuters" all rights reserved by the original author.