British stocks are seeing their biggest rise since early January after inflation fell

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British stocks this week posted their biggest rally since early January, as investors braced for a market that has lost ground to global gains this year.

A larger-than-expected drop in UK inflation in June helped London’s FTSE All-Share Index rise 3.1 percent in the week ending Friday, its best performance since posting a 3.3 percent gain in the first week of the year, according to Bloomberg data.

Real estate groups and homebuilders were among the biggest winners, with Persimmon, Barratt Developments and Taylor Wimpey all up more than 10 percent over the week as initial indications of slowing price growth left traders scaling their expectations for where interest rates might peak.

The FTSE 100 posted a modest gain of 1 percent last year and hit a record high in February. However, the index has lagged far behind its peers in Europe and the United States in 2023. The New York S&P 500 and the region-wide Stoxx 600 in Europe are up 18 percent and 9.3 percent, respectively, since January, compared with the FTSE 100 up 2 percent.

But some argue that UK stocks are suddenly riding on its back.

“I wonder if we’ll revisit that June [inflation] “Print and I think that was today, that was the catalyst for a U-turn,” said Neil Berrell, chief investment officer at Premier Miton.

A Column Chart Of (Weekly Return, %) Showing The Ftse All-Share Index Making Its Biggest Weekly Gain Since Early January

The British stock market is cheap, said Pearl, both by international and historical standards. “Companies here are 20-30 percent cheaper than their competitors abroad, but not 20-30 percent worse,” he said. “Yes, there is malaise hanging over the UK, but I think it has now reached a point where the offshore value that is here in the stock market is at a level we have not seen before.”

Becky Qin, a multi-asset investor at Fidelity International, said she was also attracted by the pricing offered in the UK. “Valuation is really very cheap, we’re much happier to own a big UK blue-chip company versus continental Europe or the US on a valuation basis,” she said.

Roger Lee, head of UK equity strategy at Investec, said: “The fact that inflation fell below 8 per cent after months of higher-than-expected reports was psychologically significant. It suggests that the UK does not have an exceptional structural inflation problem compared to the rest of the world. Now is the time to buy UK plc.”

Others argued that the UK remained a value trap for investors. Fund manager Nick Train said last week that UK stocks were “extremely unfavorable” and could remain “frustratingly cheap for a very long time”.

The data suggests that his claims have merit. British stocks have yet to enjoy a single week of inflows so far this year, according to Barclays, while Bank of America’s latest survey of global fund managers showed 21 per cent of investors still underweight the UK. Sonya Loud, chief investment officer at Legal Affairs and Public Investment Management, told the Financial Times that the UK was on track to slide into a recession that would hit stocks.

Pearl was less concerned. “There will probably be a recession, but unless it’s a really deep recession, it may not matter,” he said. The potential rise in mergers and acquisitions worried him even more. “Our fund managers don’t want a lot of acquisitions. You don’t get a chance to make money if other people start picking on companies that are doing well.”

Additional reporting by Mary McDougal in London

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