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.
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.
George joined Polar Capital in April 2017 to manage the Polar Capital UK Value Opportunities Fund with Georgina Hamilton. Prior to this, George managed the CF Miton UK Value Opportunities Fund and the Miton Undervalued Assets Fund at Miton Group.
Previously, George co-founded Matterley Asset Management in 2008 and was co-manager of the group’s Undervalued Assets Fund. Before founding Matterley, George was a Director of Equity Sales at Credit Suisse.
Georgina Hamilton, CFA
Georgina joined Polar Capital in October 2016 to set up the UK Value Team. Prior to this, she was with Miton Group where she managed the CF Miton UK Value Opportunities Fund and the Miton Undervalued Assets Fund.
Previously, Georgina was a lead analyst for the Undervalued Assets Fund at Matterley Asset Management. Georgina holds a double first in Biological Anthropology and Natural Sciences from Jesus College, Cambridge and is a CFA charterholder.
