UK avoids triple dip but markets muted

25th April 2013

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The UK has avoided a triple dip recession growing at 0.3 per cent in the first quarter of the year as the BBC reports an improvement hailed by Chancellor George Osborne.

Henderson chief economist Simon Ward has been suggesting the numbers have been improving for some time and in his Mindful Money column he says the figure may actually downplay the improvement.

J.P. Morgan Asset Management’s Global Market Strategists Dan Morris and Tom Elliott note that the initial market reaction has been muted.

They add: “While positive, today’s numbers don’t resolve to the ongoing debate over the primary cause of the slow growth in the UK and whether it is more attributable to the implementation of government austerity or dependent on continued weak growth from the surrounding Eurozone economies.

“Investors shouldn’t be overly focused on the impact of the UK GDP figures or judge their allocation to UK equities on the back of this. UK equities look attractive despite the weak economic backdrop, particularly when you consider most fixed income options in the UK like gilts, linkers and corporate bonds look extremely expensive.

“Investors seeking growth should be allocating primarily abroad, particularly towards emerging market equities, but still UK equities have done well so far this year and that should continue. The large cap UK index is up 6% year-to-date, beating Europe ex-UK. Performance is not quite as good as the MSCI USA index but valuations for UK equities are better than they are for the US. Meanwhile, UK small cap stocks continue to overcome weak domestic growth in outperforming on a relative basis.”

Richard Drivers, Caxton FX Analyst, says the outlook for sterling has brightened though the figures surprised him.

”This figure really did surprise us; I don’t think we were the only ones thinking that the risks of a surprise were skewed to the downside. The services sector remains the UK’s key growth engine but it was encouraging to see the production industries offer some upside as well. With the eurozone recession deepening and the global climate looking gloomy in general, I don’t think many people are expecting UK growth to kick on from here.

“It was crucial for confidence that the UK avoided a triple-dip and it makes a QE response from the BoE considerably less likely in May. It will be a huge relief to George Osborne and puts him in a stronger position to defend his austerity programme. Major risks still hang over the UK economy but this certainly brightens the outlook for sterling a little.”

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