Fisher Investments Editorial Staff
GDP, Geopolitics

London Fog

By, 10/26/2009
  Story Highlights:
  • While consensus expectations were for modest growth, UK GDP contracted again in the third quarter.
  • This is the longest decline since quarterly records began in 1955, and the largest peak-to-trough since the early 1980s.
  • We've been less enthusiastic about the UK for a while, given their heavy Financials and Consumer Staples exposure and increased political and regulatory risk.
  • British weakness shouldn't stop the global economy—and stock market—from advancing.


When short on headlines, a sure-fire attention grabber is comparing some scenario today with some long-gone era. We've seen plenty of that of late, with ample comparisons of today to the Great Depression. A bit misguided—folks forget the 1980-81 and 1974-75 recessions could be seen as bad if not worse than the latest recession, depending on how you measure. And that's certainly true in the UK—it's recession reaching the largest peak-to-trough decline since the 1980s. 

This latest development, courtesy of the Office of National Statistics' announcement of Q3's GDP decline, was surprising given the consensus forecast for a return to modest growth. Instead, Britain saw its sixth straight negative quarter, for the longest streak since quarterly records began in 1955. Granted, it's just the preliminary report—early figures tend to be revised, government data is notoriously wobbly, and some suggest the ONS tends to miss the mark more than most—but continued recession in Britain last quarter isn't happy news.

Still, this doesn't much change the country's stock market outlook in our view—relative to most other countries, UK stock market prospects haven't been great for a while, and the continued weakness just underscores that view. Keep in mind, Financials dominate the UK economy—nearly 25% of their stock market—closely followed by Consumer Staples. The former ensured the Brits got slammed harder than most on the downside, and the latter will probably be a drag on the upside. Stock categories that fare worst in the end of a bear market tend to bounce back biggest in the new bull, and inelastic sectors like Staples just didn't fall as much; therefore, they won't bounce as big. Economically sensitive sectors—Industrials, Materials, Consumer Discretionary—are bouncing back biggest and are likely to continue for some time. While the UK market has advanced despite continued recession, gaining over 17% last quarter, other countries with more exposure to the "bounce-back" sectors should fare better—at least for awhile.  

The political situation also doesn't help. Uncertainty already abounded, as Gordon Brown's Labour Party has long been certain to lose the next election, which must be called by next June, to David Cameron's Tories. Cameron and his team have been noncommittal on their economic plans, though they have conceded a tax hike isn't out of the question. Increased banking regulation, having been bandied about by all three major parties, is also likely. Combine this with possible climate change legislation and other measures, and that's a decent drag on UK stocks.  

Still, while folks fear England's immediate outlook is as gloomy as their weather, global investors needn't be downcast. Representing roughly 4% of global GDP, the UK isn't significant enough to derail the larger recovery. After all, the whole world never moves in precise lockstep. France, Germany, Japan, and China all grew, and the US is widely expected to follow suit when preliminary results are announced next week—as more of the world resumes growing, the global economy can rebound nicely even as some countries fall a bit behind. And with global stocks going gangbusters in advance of the recovery, investors shouldn't let a shock contraction in one small country scare them from stocks. 

*The content contained in this article represents only the opinions and viewpoints of the Fisher Investments editorial staff.

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*The content contained in this article represents only the opinions and viewpoints of the Fisher Investments editorial staff.


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