Equities are poised for a significant upswing this year as central banks initiate long-awaited interest rate cuts, and investors embrace the advantages of a positive rate environment while navigating the waning effects of the inflationary storm.
Analysts at Liberum foresee a market rally beginning in the second quarter of the year, extending through most of the year. They highlight historical data indicating that when initial valuations have been as depressed as they are presently in the UK and Europe, investors have typically realized double-digit positive returns over the subsequent three to ten years. Unless certain risks materialize, the brokerage firm estimates that UK and European equities will deliver double-digit annual returns, with real returns reaching approximately 6% per year in the UK, over the coming decade. Furthermore, small-cap stocks are expected to outperform large caps, as evidenced by trailing 12-month price/earnings ratios showing the FTSE Small Cap index trading at a significant discount of 45.7% compared to the post-1996 average.
The potential resurgence of interest in undervalued London shares provides optimism, especially if speculations regarding a UK Isa (Individual Savings Account) materialize—an advancement that would be widely welcomed. Such a development would offer relief to those impacted by the ongoing liquidity drought. Both retail and institutional investors have been shedding their domestic shares due to various factors, including companies facing headwinds in a challenging macro environment, expectations of mediocre returns, the allure of bonds, cash, and US shares, the dearth of compelling technology firms and new entrants, income strain amid a cost-of-living crisis, and substantial shifts in asset allocation within pension fund portfolios. Retail investors alone withdrew a net sum of £22.6 billion from UK funds in the seven quarters leading up to September last year, according to the Investment Association.
As investors consider the potential resurgence of London shares, the prospect of renewed interest offers hope for a market previously beset by liquidity challenges, potentially heralding a new phase of growth and opportunity in 2024.