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Eight reasons for UK investors to be positive in 2024

Despite a lot of negative talk among investors, especially after the UK market lagged international peers by miles in 2023, one City big-hitter thinks we should be far more optimistic. Here’s why.

3rd January 2024 14:42

by Graeme Evans from interactive investor

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Reasons for UK-focused investors to be more cheerful have been flagged by a City bank after it noted eight things that add a silver lining to the economy in 2024.

The UK ended 2023 on the brink of recession but Deutsche Bank’s commentary sees potential upside risks building on the back of falling inflation and stronger real wage growth.

Modest tax cuts and the prospect of a reduction in dual fuel bills by the spring should benefit UK household budgets, alongside potential interest rate cuts from May.

Deutsche Bank believes between 0.75% and 1.25% of Bank of England cuts are possible, fuelling its hopes for a gradual recovery in house prices by late spring.

Its other reasons for optimism are below-forecast public sector borrowing in 2023-24 and the overall prospect of a soft landing for the UK economy.

Senior economist Sanjay Raja said: “It's hard for economists to be too optimistic at the start of any year – indeed, economics is known as the 'dismal science' for a reason. But the new year brings some optimism.”

The more positive outlook was reflected in a purple patch for the UK-focused FTSE 250 towards the end of 2023, with Persimmon (LSE:PSN) and easyJet (LSE:EZJ) among those on the recovery trail.

Whereas about three-quarters of the earnings of FTSE 100 index constituents come from non-UK activities, this falls to around half for the FTSE 250. Other mid-cap stocks in the benchmark include advertising-focused ITV (LSE:ITV), Greggs (LSE:GRG) and Currys (LSE:CURY).

Inflation trends will be a big factor in their performance in 2024, with Deutsche Bank currently seeing CPI on a path from November’s annual rate of 4% towards 2% by April or May depending on how gas prices evolve over the coming weeks.

The bank added: “While there are still price hurdles to cross - mainly due to still high wage growth and price indexation - inflation is falling faster and further than we, or anyone else, expected.

“We see CPI averaging 2.7% for the year, with risks skewed very much to the downside, depending on where April energy bills land.”

The bank believes lower energy prices will add close to £10-15 billion in cost savings for households this year relative to 2023, contributing not just to demand but allowing for more productive spending to take place elsewhere in the economy.

On tax cuts, Chancellor Jeremy Hunt’s 6 March Budget could see a 1p cut to the basic rate of income tax and a potential drop in inheritance tax rates from 40% to 20%.

Real wage growth pushed into positive territory in July and it's likely to stay that way for a sustained period of time, with Deutsche Bank forecasting growth of 1.75% in 2024.

The bank also thinks the worst is nearly over in terms of the fall in house prices, with its base case still for a 6% peak-to-trough decline.

Raja added: “We think there is some upside to our forecasts, given rising household sentiment of late. More certainty around the interest rate environment should also buoy the housing market. We expect a gradual recovery in house prices by late spring.”

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