- FTSE at the widest discount since the global financial crisis
- Tighter-for-longer interest rate policies?
- UK underlying dividend growth rate at 5.4 per cent
When we evaluated prospects for the UK market at the end of last year, we noted that the negative correlation between bonds and equities had become less evident and that we were faced by “a prolonged period of sluggish (or negative) growth”. Well, we were hardly in Mother Shipton (the soothsayer and prophetess) territory there, but we also speculated that the discount rate applied to future earnings was about to become more unpredictable in 2023. Again, that statement might best be filed under the general heading of “stating the obvious”, but after a decade of ultra-low interest rates, we could be forgiven for overlooking – or at least underestimating – the relationship between stock market valuations and metrics like these.
Sluggish corporate earnings growth also presents a problem for investors; normally, if it keeps pace with the level of rate rises, it can usually offset the discount effect, but that simply hasn’t played out. Yes, investment markets are not fixed, but it wouldn’t be unreasonable to suggest that the breakdown in the standard assumptions linked to capital markets are due to the distortive effects of a decade-long monetary policy experiment. We simply became addicted to cheap money – and now we’re going cold turkey.