SPR/IPF UK Outlook Seminar
Tuesday 9 January
Allen & Overy, 1 Bishops Square, London, E1

Inflation still clouding the view

Even if inflation is clearly falling in the UK and internationally, policy makers’ focus on the issue is likely to limit the prospects for recovery in the short-term at least.  In an event that featured three economists, Azad Zangana of Schroders stressed that core inflation remains stubbornly high in the UK and may continue into the medium term due to labour shortages and costs associated with the climate crisis.  And with the cost of essentials such as fuel still elevated, consumer confidence remains weak, even if mortgage rises have proved to be less painful overall than some may have feared. Zangana suggested that investment markets may be relatively positive based on the expectation of big rate cuts over the year to come, but this could be too optimistic.

Rupert Watson of Mercer, taking a global multi asset class perspective, did take a rather more positive view, proposing that despite the rally in gilt and equity values last year, investors might still see the potential for further growth.  Demand for gilts continues to be buoyed by investors’ desire for duration, and while the ‘Magnificent Seven’ US tech stocks are undoubtedly looking expensive, the potential of AI could mean that their upswing has not yet run its course.  Meanwhile Asian markets appear better value, with Japanese stocks likely to benefit from the cheapness of the Yen and the economy finally ‘turning a corner’ after the long era of deflation.  Watson is therefore expecting a ‘soft landing’; for Mercers staff this means no business class travel and a ban on hiring, but not the aggressive cutbacks and redundancies associated with a ‘hard landing.’ Meanwhile 2025 should see a good recovery.

Turning to real estate in particular, Sabina Reeves of CBRE Investment Management examined the two sides of the market outlook coin.  On the one hand capital markets remain doggedly in the doldrums after three years of ‘brutal adjustment’ following the ‘methadone’ of QE.  Although there had been some ‘price discovery’ through 2023, there is still some way to go before sellers will be enticed back into the market, despite there being significant capital allocated to the sector and waiting to be placed.

Nevertheless, CBRE IM are forecasting a healthy 8% total return for UK real estate in 2024, she explained.  Underlying this they see living, logistics and ‘next generation’ sectors as relatively well placed, even if Reeves noted some danger of ‘structural obsolescence’ among older logistics assets due to the growing need for compatibility with robotics.  She also suggested that there could be a ‘tactical’ play towards raising the allocation to retail, with favourable yields now available in good locations.  She concluded by observing that while we may be through the worst of the downturn, a capital market revival may take a few more months to materialise.

In the subsequent panel discussion, which was moderated by Anne Breen of abrdn, who also chaired the seminar, Zangana and Watson debated the likely medium-term rate of inflation. Zangana tended towards 3%, while Watson suggested the figure could get down to 2%.  The former noted one effect of deglobalisation might be to raise the cost of manufactured goods, but the latter saw the impact of AI and Indian economic development as working in the opposite direction.  Answering an audience question on the importance of the climate crisis for real estate investors, both Breen and Reeves stressed that this issue was now integral to their businesses, even if real estate is only just starting to develop the information sources it needs to respond.  Reeves also said that it very much depends where one is based, with UK and European investors far more engaged than those elsewhere around the world.

Tim Horsey