The Cambridge Weekly –19th February 2024

The Cambridge Weekly – 19th February 2024

UK not growing really, not growing nominally

As regular readers will know, we tend not to comment on UK matters as much as some, partly because the investment portfolios we manage for UK clients are quite globally focused. But the UK as our home is important to us and last week we had an enormous amount of important domestic information. And, of course, the upcoming Spring Budget and General Election potentially later this year will affect us all. We write on the fiscal dynamics in a separate article below.

The UK is in a technical recession, defined as two quarters of real growth contraction (‘real’ = after subtracting inflation). There is much discussion about whether this is really a recession, what that means for public policy and, of course, what it means for the election.

The anatomy of asset bubbles

The artificial intelligence (AI) driven tech stock rally has been nothing short of extraordinary. Since the release of ChatGPT in late 2022, the tech-heavy Nasdaq index has gained nearly 50%. Making that rally all the more impressive is the fact that capital markets in general went through some testing times against a backdrop of slowing global growth, and the sharpest interest rate rises in a generation. As in any bull market, sustained price increases make investors nervous that stocks are, or will soon become, overvalued. But AI-related companies keep pushing ahead, with the Nasdaq already up 6.6% year-to-date at the time of writing

The UK’s fiscal bind tightens

With the Spring Budget fast approaching, tax cuts are reportedly top of Chancellor Jeremy Hunt’s agenda. According to multiple news outlets, these giveaways might have to be funded by additional public spending cuts – though the latter would likely be delayed beyond an upcoming UK election. Analysts at Morgan Stanley expect Hunt to announce a £15 billion package, mostly focused on income tax cuts and “fiscal easing now, spending cuts later”.