Market Update: Silver linings and gilt-edged opportunities in the UK

Highlights: Amid heightened uncertainty around economic growth in the UK, new trade deals. For the faithful investors, this may well be seen as a turning point for investing in the UK. We prefer to wait for a more tangible improvement in economic sentiment before ratcheting up risk. This leads us towards gilts, where real yields remain attractive.

• The Bank of England (BoE) cut the Bank Rate by 25bps to 4.25 per cent, as expected. The split 5-4 decision did come as a surprise to markets, but with two members supporting a 50bps cut, this shouldn’t be read as a hawkish sign, but rather a reflection of the heightened uncertainty of the geopolitical backdrop. The committee is weighing up scenarios on the UK economy and continue to emphasise that they need to remain data dependent
• A slew of weaker economic data has led to a broad consensus of cuts to economic growth forecasts and the BoE echoed this trend with a 25bps cut to its 2026 GDP growth to 1.25 per cent. While this all sounds very gloomy, the good news is that plummeting energy prices and a strengthening GBP have pushed inflation forecasts lower. This gives the BoE more room to be dovish in the latter half of the year
• The more faithful may even reason that this could mark a turnaround in sentiment towards the UK. We prefer to remain selective on equity investments for now and keep an eye on the data for signs of improvement
• The prime opportunity for us is in gilts. Around the 5-10Yr maturity, real, inflation-adjusted, yields are fractionally below 2 per cent. This is a great opportunity to lock-in near risk-free rates of return that would have seemed well beyond reach only a few years ago. If the base rate falls to 3 per cent in Q3 2026, as we expect, then there is also room for capital gains
• GBP has strengthened largely thanks to USD weakness. There is a risk of further USD weakness ahead and a risk of a structural adjustment to USD. For those with limited risk appetite for currency moves, diversification and hedging strategies can be appealing