Low expectations, even lower valuations

​Britain has suffered through an omnicrisis for almost six months and recession looms on the horizon. And yet UK markets have been a bright spot, notes Rathbone Income Fund co-manager Alan Dobbie. What’s going on?

1 February 2023

Back in late September, in the wake of the ill-fated mini-Budget, you were hard pushed to find a positive news story about the prospects for the UK’s economy, stock market or currency.

The list of worries was endless: the pensions crisis…the cost-of-living crisis…the sterling crisis…the mortgage crisis...all perfectly valid concerns and, to a greater or lesser extent, all still with us today. And yet. The table below shows how the UK’s equity, fixed income and currency markets have performed since then:

Total Return: 30 September 2022 to 31 January 2023

FTSE 100


FTSE 250


Conventional gilt index


Sterling v USD


Source: Bloomberg, Rathbones; measured in sterling

Meanwhile, over the same time period, sterling-based investors would’ve received just 7% from the FTSE World stock market index and only 3% from the S&P 500. If you’d bought the tech-heavy Nasdaq you would’ve lost 1%.

A classic dead-cat bounce for the UK, we hear you cry! Perhaps. We won’t know till the future comes, but we think it’s only the latest illustration of something interesting going on beneath the surface of markets.

In the years following the Global Financial Crisis, investing became rather one-dimensional. Many investment processes became almost entirely focused on trying to find the ‘best’ companies – those with the fastest growth rates, the highest returns on capital, the greatest ESG credentials. In many cases, little thought was given to how these fundamentals were reflected in stock prices. Or maybe too much thought was given to justifying how high they got. In the end, valuation – if considered at all – was an afterthought.

In the run-up to the pandemic (and throughout most of it) this strategy paid off handsomely and many more investors jumped to get in on the action.  However, it’s becoming clear that much of this outperformance was simply down to ultra-low interest rates and huge central bank bond-buying juicing the performance of long-duration assets (those whose prices are very sensitive to changes in prevailing interest rates). The rapid reversal of easy money policies has challenged this style. Gradual re-rating of price-earnings multiples has turned to steady de-rating. Valuation, it seems, once again matters.

Time is ripe for change

This is very good news for the UK stock market because, despite its outperformance in 2022, it still trades on an incredibly cheap valuation versus the global equity market.

Investor value UK profits less highly than elsewhere - for now

Source: Bloomberg, Rathbones; data to 31 December 2022

Added to that, consumer and investor sentiment remain close to rock-bottom. This too matters. When both expectations and valuations are so low, news flow need only be slightly better than awful for share prices to rocket.

Just look at how the FTSE 350’s retail and housebuilding stocks have performed since the end of September (keeping in mind that mortgage rates and the cost of living have soared).

Total Return 30 September 2022 to 31 January 2023





FTSE 350 Retailers


FTSE 350 Housebuilders




Taylor Wimpey


JD Sports


Barratt Developments


B&M European Value


Crest Nicholson






Marks & Spencer








Howden Joinery


Berkeley Group


Pets at Home




WH Smith




















*FTSE 350 Household Goods and Home Construction sector

What incredible news justified such large moves? Christmas retail sales were hardly booming – volumes were down, profit margins were lower, footfall is still well below pre-COVID levels. Yet avoiding the worst of the market’s fears was reason enough to cheer.

Building a low bar

You must look even harder to find the good news from the housebuilders’ recent updates. Volumes and house prices are likely to fall in 2023, first-time buyers are struggling to get mortgages, planning department red tape is delaying new site openings. The only crumbs of comfort are that mortgage rates are off their recent highs and web enquiries picked up a little in the days following Christmas. So low were the expectations built into housebuilder share prices that the sector has rallied hard in the new year.

So what does all this mean for the prospects for the UK market? We are highly encouraged that valuations and expectations once again matter. While this is a clear risk for highly rated market darlings, it could be a boon for the cheap and unloved – and few are cheaper and less loved than the UK.

Recent UK economic news flow has been weak but stable. November GDP was positive (just), for the second month in a row. Data from Deloitte suggests that consumer confidence has improved after 15 consecutive months of decline. Inflation, though still elevated, declined in both November and December.  

More money flowed out of actively managed US funds than into them in 2022 for the first time since Morningstar started tracking 30 years ago. Perhaps the time has come for people to look at ideas and regions other than the ones that have reigned supreme for many, many years.

Higher interest rates have brought valuation back to the fore again. Now it doesn’t just matter how bright your future is. Once again, investments are judged on how much you have to pay for that future.