Our Global Head of Fixed Income Research Andrew Sheets examines why investors might be overlooking the stability and performance of UK assets, despite persistent negative sentiment.
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Andrew Sheets: Welcome to Thoughts on the Market. I'm Andrew Sheets, Global Head of Fixed Income Research at Morgan Stanley.
Today, why the UK may need better PR.
It's Friday, August 14th at 2pm in London.
The last decade has been rough for the United Kingdom. Brexit was a true economic earthquake, and the subsequent weakening of economic ties to mainland Europe, the UK's largest trading partner, made economic activity weaker and more complicated.
Then COVID hit the economy hard. So did spiking energy prices when Russia invaded Ukraine. Political volatility has been high, with seven prime ministers in the last 10 years. And at present, UK growth is weak, inflation is too high, and debt to GDP is rising.
Moreover, in a post-COVID world that's increasingly driven by the profit and power of technology, including AI, the UK market seems almost stuck in another era. Of the 10 largest companies in the U.S. stock market, eight are in technology. In the UK, none of the 20 largest companies are in tech.
Safe to say, being downbeat on the prospects for the UK is one of the most consensus views that I encounter. But it can also be deceiving. Simple stories in the market rarely are.
Let's start with the argument that UK markets are boring, stagnant, and being left behind by their lack of technology. It's just not true. Through early August, the S&P 500 has returned 85 percent over the prior five years. The UK market? It's returned 82 percent. And over the last twelve months, the performance of the UK and U.S. markets are also similar. In short, don't judge a book by its cover.
The UK's currency, meanwhile, shows no sign of global investors shunning the island. Over the last 10 years, the UK pound has actually gained value against the U.S. dollar. Notable given how strong the performance of the U.S. economy and markets have been over that time. And that's also pretty impressive relative to its peers. Over this same timeframe, the value of the Japanese yen, the Brazilian real, the Indian rupee, and the Korean won have all fallen significantly. The UK's currency, on a relative basis, has outperformed.
Now, the UK's growth is weak. Morgan Stanley forecasts growth of just 1 percent this year versus a bit over 2 percent for the United States. But it's notable just what sort of headwind the country has been dealing with. The UK household and corporate sectors are both increasing their savings rates and doing so at the same time; and more savings means less spending and economic activity.
To put some context around this, U.S. households are currently saving only about 3 percent of their disposable income. In the UK, it's over 9 percent. And so, if that UK savings rate can just simply stop moving higher – or even fall – well, it would represent a big support to growth going forward.
But aren't we avoiding the big question, the fiscal question? After all, we at Morgan Stanley forecast that general UK government debt to GDP will be about 96 percent this year, some of the highest levels since World War II. But this is a global market, and I do think that the relative picture matters.
So, when thinking about the UK's 96 percent debt to GDP ratio, let's consider what the numbers are elsewhere. That ratio is 120 percent in China. It's 120 percent in France. It's 125 percent in the U.S. It's 138 percent in Italy, and it's 208 percent in Japan. And out of all of these countries, the UK is the only one where we think the government deficit is materially smaller in 2027 than it was in 2025. Also, year-to-date, 10-year bond yields in the UK have risen less than yields in the U.S. or Japan.
A new UK Prime Minister does raise the potential for new policy, something investors will need to watch closely. The country remains sensitive to swings in global energy prices. Yet we think the underlying story is more nuanced and positive than often gets discussed.
Market performance has been bearing this out, and in many cases, the bar is low.
Thank you, as always, for your time. If you find Thoughts on the Market useful, let us know by leaving a review wherever you listen. And also tell a friend or colleague about us today.
