It’s been a bumpy economic ride for the UK in recent years. The 2023 Opinions and Lifestyle Survey by ONS shows that the greatest concerns by Brits are cost of living, NHS, the economy and the environment. KPMG analysts expect growth to remain slow through the rest of 2023 and well into 2024. Conversely, interest rates might have reached their peak, which will turn the attention of the Bank of England towards fiscal policy. So, what should we expect from the capital markets in the world’s financial hub? Let’s explore the London finance scene.
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The UK Economy and Its Impact
The UK is expected to see the slowest growth among the G7 countries in 2024. The IMF expects the nation’s GDP to grow 0.6%, down from the previous forecast of 1.0%, and below the growth expectations for Germany and France of 0.9% and 1.3%, respectively. However, inflation has continued to ease, although it is still higher than that in many other Western economies. Price pressures have eased with global supply chain bottlenecks having been resolved and wholesale energy prices falling. Domestic factors, however, have played a key role in keeping the inflation rate higher for longer, which could lead to inflation declining to the 2% target later than expected.
In fact, the UK’s National Institute for Economic and Social Research (NIESR) expects inflation to remain above target till 2025, falling to 5.2% by the end of 2023 and 3.9% by end-2024.
Another factor to consider is the upcoming general election in 2024.
While interest rates have now potentially reached their peak in this cycle, uncertainty remains regarding their future path. This coupled with uncertainty around future plans for fiscal policy as the UK heads into an election year, may see businesses choose to further delay investment. Yael Selfin, Chief Economist at KPMG UK.
So, while businesses might see an uncertain future, individuals might not fare much better, given that the NIESR believes that inequalities, in terms of assets and income, will continue to rise in 2024 due to limited real income growth, low (or no) savings, higher energy, food and housing costs, and increased debt. All this will lead to lower disposable income, which means lower investments.
The Silver Lining
Economic data shows that the UK economy has been performing much better than expected following the lockdowns of 2020-2021. Economic activity, consumer demand and corporate earnings have been resilient despite the prolonged monetary tightening. Plus, much of the bad news has already been priced in, and analysts say the UK equity market is “extraordinarily cheap.” If a recession does occur, it could be the event that sparks a rally.
Investors are also looking at the best way to position their portfolios going into 2024, given that interest rates are likely to remain higher for longer and the ongoing Israel-Gaza conflict could impact oil prices.
The Equity Market
Analysts expect the FTSE 100 to end 2023 mostly flat, at about 7,700. The UK index stood at 7,417.73, as of November 6, down 1.81% YTD. While global companies are unlikely to make any major revisions to their earnings before 2024, any move in the FTSE 100 will likely be driven by changes in overseas earnings and exchange rates. When the pound sterling declines, stock prices of large, multinational companies tend to go up since the value of their international earnings rises. And 75% of the earnings of FTSE 100-listed companies come from overseas.
The composition of the index makes it an interesting investment with both cyclical and defensive stocks. About 30% of the FTSE 100 is made up of healthcare and consumer staples stocks, which are useful defensive plays during weak economic conditions. Another approximately 25% of the index consists of energy and materials stocks that are cyclical, benefitting from higher commodity prices. This mix leads analysts to believe that the index will remain largely unchanged going into 2024.
The Fixed Income Market
Analysts say this UK market looks set to perform well. Rate hikes so far have lifted government debt yield to around 5%. Although prices could vary due to uncertainty, the yields are unlikely to rise significantly in the near future. A mix of sovereign and investment-grade corporate debt could offer investors an opportunity to hedge against equity market uncertainties through high yields. Multiple forces are transforming the capital markets and not just in the UK. Higher interest rates, lower money supply, tighter regulations, climate change and geopolitical tensions are some of the major influences. Plus, the pace of technological advancements is leading to disruptive trends, such as embedded finance, open banking, digitisation of money, generative AI and growing interconnectedness between industries.
Key Concerns and Challenges of Brokers in the UK
One of the biggest opportunities for brokers is that 36% of Brits invest regularly, with 44% of them putting their funds into the equity market. But this also brings the biggest challenge for brokers. The market is saturated with brokers competing for attention. Competition has reached a point where brokers need to ensure lower costs, cutting-edge trading tools and excellent customer service just to stay in the race.
Cybersecurity is another challenge. The evolution of AI has been both a bane and a boon in this regard. A 2023 Regula survey has highlighted the proliferation of deep fakes, with 37% of organisations reporting deep fake voice fraud and 29% reporting deep fake videos. VMware’s Modern Bank Heists 5.0 report for 2022 shows that 74% of the financial firms surveyed faced ransomware attacks, with 65% paying the ransom. So, brokers need to not just focus on cutting-edge trading tools but also on the best technology for cybersecurity to protect customer data.
Navigating the regulatory framework is yet another focus area for brokers. The UK Financial Conduct Authority (FCA) has set strict regulatory guidelines for brokers offering services in the country. Any breach could lead to severe consequences, including heavy penalties or revoked licenses. This makes staying on top of the latest regulatory updates indispensable.
For instance, the FCA has cracked down hard on Binance, the largest crypto exchange in the world. The financial watchdog has forced the exchange to stop all advertising in the UK, as well as accepting new customers. Legislative changes have put crypto assets under the purview of the FCA. The regulatory body has introduced rules for the marketing of crypto products to ensure a better understanding among customers of the asset class and the risk involved. Plus, only authorised companies can market cryptocurrencies and accept new customers in the UK.
The FCA has also joined Project Guardian of the Monetary Authority of Singapore. This is a collaborative initiative by regulators worldwide to explore fund and asset tokenisation use cases, as well as DeFi. The project will share knowledge and evaluate the benefits, commercial use cases and regulatory challenges of fund and asset tokenisation.
Work With A Marketing Agency That Gets It.
Brokers don’t have the time or resources to keep track of all regulatory changes, market developments, technological advancements and marketing trends. This is where partnering with an agency that specialises in the finance sector and stays abreast of regulatory updates worldwide can make a difference. Contentworks is Europe’s leading financial services marketing agency. Meet us in London or book a free Zoom call.
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