The outlook for the UK is turning more positive as we head into 2025. The UK is forecast to see continued interest rate cuts throughout next year, finishing just below 4% from a peak forward rate of 6.5% in mid-2023. Also falling is the UK’s political risk premium that reduced gradually over 2024 thanks to a reasonably centrist government with a clear majority. This is at a time when many European peers face messy and polarised political elections.

This combination of rate cuts and lower political risk premium should bring down the cost of capital throughout 2025, a prerequisite for the UK to rerate. There are risks, such as UK core inflation remaining elevated; however some forward-looking indicators point to waning wage pressures. The balance of probability suggests the UK will see a falling cost of capital throughout 2025, laying a much-needed foundation for a rerating.

The UK is expected to be one of the fastest growing countries in the G7 in 2025, assuming the forecast UK income growth translates into spending growth rather than savings. With ONS data  suggesting around half of excess savings are being used to reduce outstanding loans and debts, falling interest rates should naturally channel real income growth back into real income spending. In turn, this be positive for GDP growth and, more crucially, domestic corporate earnings in 2025.

We will continue to seek to capitalise on mispricing across the UK market-cap spectrum investing in businesses that are not just cheap but also exhibit improving returns on invested capital and strong balance sheets.