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UK growth stocks are enjoying a useful run at the moment. I FTSE 100 up 20% over the past year, with benefits on top. On the contrary, i S&P 500 it’s up just 15%, and US stocks generally pay less as well.
As an anti-environmentalist, I tend to think that the good times won’t last. But this time, I think there may be more to come. I’m not talking about the short term, because what the markets do over the course of weeks or months is anyone’s guess. I think in the next five or 10 years.
My optimism may improve when the UK economy is barely growing, inflation is still stuck, unemployment is rising and confidence is falling. However, I see three things that can lift the spirits.
Low interest rates
Analysts including ING and Capital Economics expect inflation to drop to 2% this spring. That flies in the face of the Bank of England’s target and will open the door to a further cut in the key rate, possibly down to 3%. That would boost the economy and push more savers into stocks for better returns.
Energy may be cheaper
Few things have defined the cost of living crisis more than our rising gas and electric bills. Natural gas prices have risen in the cold winter, but long-term prices have not budged. Oil has risen to $67, yet the International Energy Agency warns of oversupply as demand cools. Time will tell.
Expansion policy
Donald Trump’s One Big Beautiful Bill is being extended, and the US Federal Reserve is still buying $40bn of bonds a month. More US rate cuts will come at some point as well. Everything will help.
There is another potential catalyst. Artificial intelligence is already showing the first signs of improving workplace efficiency. If it fulfills that promise, it could end the productivity crisis that has plagued Western economies for decades.
Yes, I could be wrong. AI could be a catastrophic bubble. Inflation can seem stubborn. Energy prices could rise again. Political shock is everywhere. But the pessimism is so deep that my opponent suspects that things may be better than fear.
If I’m right, this could be the one opportunity in a decade to buy UK growth stocks before they take off.
Shares of JD Sports could fly one day
I have been adding JD Sports Fashion (LSE: JD) eagerly. The self-proclaimed ‘King of Coaches’ has had a miserable run, with his shares halving over the past three years. They have shown signs of recovery, up 3.8% last year, but the damage remains extensive. The compression of the cost of living has reached the need, a valuable partner Nike has struggled, and the prices haven’t helped.
Sales were down for the third Christmas run in the UK and Europe, but up 1.5% in North America, which now accounts for 40% of JD’s revenue. The business is set to generate £400m of free cash flow and may launch further share buybacks.
The valuation looks absurdly cheap to me, with a price-to-earnings ratio of just 6.8. I’ve noticed that when sentiment kicks in, JD Sports tends to move faster than the broader market.
There is still a lot that could go wrong as consumers and Nike struggle. But with a five-year perspective, I think it’s worth considering. Now let’s see if my positive attitude plays out.
