Christopher Johnson: The first six months of Labour’s reign in Britain has been a very bumpy ride. The UK government’s tax and spending plans, outlined in last year’s budget has caused a stir, with bond yields rising and fears around a recession brewing. But will UK equity markets still do well in this environment? To discuss all this and more. I’m here with Tom Beckett, the co-CEO of Canaccord Genuity Wealth Management. Tom, thank you so much for being here with me.
Tom Becket: Well, thank you for having me.
CJ: So my first question to you is what was your initial reaction to UK gilt yields spiking?
TB: Why has it taken so long? I think that’s probably the key point. You described the first six months is bumpy. I like the term auspicious. It doesn’t bode particularly well so far. It’s not been the positive, confidence inducing start that we all hoped for and it’s a shame, because all that’s been given away in six months, you know, the labour government was elected, unsurprisingly, and that was met with a sense of relief by lots of international investors. That relief has gone, the confidence has gone, and in terms of bond yields, I mean, it makes sense. Yes, certainly the Labour government and Rachel Reeves herself will be pointing towards the fact that this is part of a global trend.
TB: That’s true to a certain extent but the last week has not been good. This is becoming an idiosyncratic issue and one that they really need to grab a hold of quickly. So, my immediate response is, unsurprising and a bit belated.
UK Recession Fears Hit the Labour Party
CJ: So is the UK on track for a recession, do you think? Is that fair to say?
TB: Whether it’s a recession or not, it’s a question. I think it really feels like a recession. The UK is, in part due to the nature of our geography, but also because of the nature our open economy, at the mercy of what happens around the world as well. And I think our view for 2025 is that growth isn’t going to be great, but it’s not going to be disastrous either. The US will probably be quite strong. Europe will continue stagnating. It keeps hope of an improvement from China which might be why Rachel Reeves is just gone there. And I think if we are to see the global economy perform satisfactorily, the UK would probably be a bit miserable, but kind of in the mix. I don’t think we’ll see an outright recession, but very low growth and persistently high inflation. That’s not great and might well feel like one, Chris.
CJ: And are UK equities shielded from this worst-case scenario?
TB: Some, some not. I mean, let’s be honest about it. The UK equity market is kind of misleading in its title because a lot of the UK equity market has got nothing to do with the UK whatsoever. Like I think something like 70% of revenues now from UK listed companies are generated overseas. So, are they protected from it? Shielded from it? Quite possibly. I mean, a mining company, an oil company would generate its revenues from parts that are very different to the UK. So, I mean, I think if we were to see a satisfactory growth outcome for the global economy, then I think those companies will perform just fine. The more interesting question, and I think this is very relevant here today is, its very hard for us to imagine things getting much worse.
TB: If you remember when Tony Blair was first invested in that Labour landslide, a proper landslide. The whole concept was things can only get better, by D:Ream. So we don’t listen to that again. But remember what it was? I think there’s a case to be made for that here. UK domestic equities are now absolutely loathed by everybody. Could that be a surprising performer in 2025? Quite possibly.
Which UK Sectors Present Opportunity for Investors?
CJ: And which UK sectors do you suspect will be standout performers this year?
TB: Well, let’s think about some international elements and some sort of more domestic ones. I think, on the international space. One of the more, abject performers of recent times, because of the political winds and the election of Donald Trump and the inclusion of Robert F Kennedy, in his cabinet. And I think he will get confirmed, but we’ll have to wait for that. It’s been the healthcare sector. The UK’s got some great healthcare companies. Could they start to perform better this year? I think there’s really a case to be made from that. Likewise, an upside surprise from the economic stimulative efforts of the Chinese government. Way too late and far too small so far.
TB: But if they were to improve and the transmission of those stimulus measures were to get better, then maybe the materials sector could also perform better, or some of the big resources companies. But I think the surprise this year would be, as I’ve already mentioned. What happens if the UK economy is not as disastrous as everyone expects? What happens if Rachel Reeves and the Labour government do get a hold of this situation, which they in no small part created themselves. Could that be a better backdrop for UK domestic companies? Some of the retailers, and things like that, which are really out of fashion. That could be a surprise performer this year, and one which not many people are now expecting or invested for.
CJ: What surprised me is how well, some of the retailers have done. Does this infer that consumer confidence is stronger than previously thought?
TB: I think some retailers, have done well, and some to my previous answer, have done quite badly. And I think there’s a case of trying to pick between the winners and the losers. Look, whatever happens in any society, there will be winners and losers. If you’re in an economic downturn, for example, some of the sort of lower end of the retail space might do better because people are shifting their spending down to some of those cheaper brands, cheaper companies, and cheaper retailers. Is UK consumer confidence disastrous? No, it’s just pretty insipid. But, you know, the employment backdrop in the UK has been okay. People’s wages have been okay. It’s just not been great. And I think that’s probably the word you would use is the outlook for the UK economy, UK consumption, and UK consumer confidence. Not great.
Will Trump Tariffs Do Damage?
CJ: And in your view, how will Trump tariffs impact UK and European equities?
TB: We don’t know yet, but people are now expecting the worst. I think if you look at the world equity markets are fascinating, and I think they’re as disjointed as they have been in the 20 odd years that I’ve been investing. US equities, particularly large companies, are as loved as they have ever been in history. Sentiment towards them is red hot. They are massively on vogue and fashionable and everyone knows they’ve been successful. And that’s why we’re seeing all the money flowing into these companies. On the other side of the equation now, there’s lots of markets around the world, sectors and specific companies that are genuinely loathed.
TB: You know, apathy would not be a strong enough word to describe the views that people have towards markets like the UK, Europe and indeed Asia, which is interesting because ten years ago, Chris, we would have done an interview like this and all people would want to talk about was China as an example. Now my view of looking at this would be that most people are out of these investments. No one really likes them. If there was to be any upside surprise, or things weren’t to be as bad as people are expecting as per the tariff conversation, then maybe you could see a significant recovery trade in some of these markets. Would that be enough to structurally damage the outlook for high quality US companies versus the rest of the world? I don’t know, but on the cyclical recovery trade, there could be a lot of money to be made.
The Diary of a CIO
CJ: And my final question to you is what is the most challenging thing about being a CIO right now?
TB: It’s always been challenging. So I’ve been a CIO since 2008. I think I really got the job back in 2008 because no one else really wanted it, which is quite understandable based upon the last 16 years of doing the job. The volatility comes with the job. There’s no doubt about that. I think also the whole, view that you should, you know, always try and present an optimistic picture. That always comes with the job even though it’s difficult like years like 2021 was quite difficult to do. I think the most difficult thing at the moment is trying to persuade investors that wealth management still has a relevance for them.
TB: There’s been so many other things recently which have caught their attention. Whether or not it’s been things like Bitcoin and cryptocurrencies or whether it’s been things like the dawn of Vanguard and the real successes they’ve had and passive portfolios. But I think that misses the point. I think the outlook for wealth management portfolios is quite good. Active investments could do better than people are suspecting. There’s lots of investments around the world that people don’t own, which are poised for recovery returns. And if you think about markets like the fixed interest markets, quite contrary to 2021 when the expected returns were close to zero, and that was quite a good case in some markets, actually, the outlook is much better. So I think the biggest challenge we have now is convincing potential investors that wealth management has a real relevance, but I genuinely believe it does.
CJ: I said that was the final question, but I do have another one. I just thought of it. Going back to kind of Rachel Reeves, if you could advise the government on how to bolster the UK economy and growth, what would you say to them to do?
TB: Yeah. Look, I think they’ve got a very difficult job. And whilst I talk about them doing badly, I have to admit the fact that they are in a position which they found themselves after winning an election that one would want to lose because there is no money and there is no growth. Those are the problems. Longer run I think we have to make it more acceptable to companies to want to come to the UK to invest, and for us to invest more in young people in research and development and make it a more supportive backdrop for companies wanting to do that, as the Trump administration is promising to do in the US, we have to make ourselves seem more like a place where people want to invest, not £600 million from China, as was just secured over the weekend by Rachel Reeves. But structurally, making this the great country we could be. With regards to research, development and education of our young people, if we can do that, the outlook is much brighter than it currently is today.
CJ: Tom, thank you so much for being here. Thank you for having me.
TB: This is Christopher Johnson for Morningstar UK.
The author or authors do not own shares in any securities mentioned in this article. Find out about Morningstar’s editorial policies.
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