The British stock market is on a roll right now. Both the FTSE 100 and FTSE 250 are on upward trajectories. The former is already up by double digits, including dividends, and the latter’s following closely behind.
However, as usual, permabear investors have crashed out of the forrest with fear-inducing sensationalist headlines predicting an imminent crash.
Among them is Jeremy Grantham, a British investor whose words carry a lot of weight. And it’s not hard to understand why. He manages a fund with over £21bn in assets and has achieved a 227% return over the last decade. That’s a pretty impressive track record, so could he be right that the end is nigh?
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Let’s take a look at the numbers.
UK GDP is a problem
While the British stock market is rallying, the economy continues to limp on. At the end of 2023, the UK fell into recession. And while GDP growth returned in Q1 2024, it landed at a whopping grand total of just 0.2%.
Low growth has been a challenge for the British economy for more than a decade. It’s a complex situation with multiple factors at play. However, a consensus among most economists is a lack of technological innovation.
For developed economies, technology plays a critical role in delivering sustainable growth. And all it takes is a quick glance at the FTSE 350 to realise the number of tech stocks on the London Stock Exchange is seriously lacking compared to exchanges like the US Nasdaq.
Another more recent problem is the rising cost of capital. Higher interest rates have been punishing for many mortgage owners. But the pressure is also seemingly being felt by British businsess as well. 2023 saw the highest number of bankruptcies in 30 years. And, so far in 2024, this trend seems to be continuing.
Employees who lose their jobs also lose disposable income. So consumer spending falls, making it harder for other businesses to grow and pay their bills. If this cycle were to reach critical mass, a spiral of wealth destruction could be triggered, leading to the cataclysm that investors like Grantham have predicted.
Taking a step back
As troubling as these forecasts can be, it’s worth taking them with a pinch of salt. Like many permabear investors, Grantham has been calling out a market crash for a decade+. And those who’ve avoided investing because of this have missed out on one of the longest bull runs in history.
The rising number of bankruptcies is troubling. But with inflation now at 2.3%, the Bank of England’s contractionary monetary policy may soon come to an end. That’s terrific news for companies with leveraged balance sheets like Warehouse REIT (LSE:WHR).
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The urban warehouse operator has already been forced to sell off several locations to keep debt under control. That’s had knock-on effects on its net rental income. However, it has also enabled dividends to keep flowing to shareholders, despite the adverse conditions. If interest rates end up getting cut later this year, these headwinds may come to an end.
Warehouse REIT isn’t the only company in this position. But providing inflation doesn’t make a sudden comeback, 2024 could be a terrific year for long-term investors, even after the robust gains seen so far.
