In this interview, Sidhant Mehta, investment strategist at CCLA, discusses the long-term outlook for the UK, the impact of the Mansion House Accord, and the company’s latest monthly publication offering valuable insights and information.
Trade policy risk, fiscal risk, and rising defence spending are the key themes that have been shaping the markets so far this year, according to Sidhant Mehta, investment strategist at CCLA. “Those are large structural type of changes, and that’s why you’re seeing the impact play out in the key risk assets of bonds, equities, and so on,” he tells Room151.
For bonds, that means a higher risk premium, especially on the longer end, “we see this particularly in the US and UK treasury yields”, Mehta says, noting that this asset class might be the most applicable for many local authorities. This has led to a “steepening of the curve, which means that the shorter end’s yield, compared to the start of the year, has fallen more than the longer end. In fact, the longer end yields have increased significantly since January. There’s a much steeper curve overall.”
He adds: “If you’re looking to raise long-term debt, the steep yield curve will work against you. The higher risk premium at the long end is making it significantly more expensive.”
Much of that risk is in the US and has been caused by President Donald Trump’s policies, with “spillover effects” in the UK.
Specifically looking at local authorities seeking to go longer-term with borrowing, Mehta acknowledges that there is “reason to be cautious…what would perhaps bring a bit more comfort to the situation, is when you start to see the Bank of England reducing their short-end rates,” he says.
“Short-term rates do influence long-term yields. The curve can’t continue steepening indefinitely. A decline in short-term rates will affect the overall shape of the yield curve and could help reduce borrowing costs, even for longer durations,” he says.
Turning to equities as an asset class, Mehta says the start of this year “was very much a continuation of US exceptionalism”. But things shifted as markets took more serious notice of Trump’s tariff agenda and other policies.
Mehta expects more volatility from the US, as he describes the confusion caused by the tariffs agenda as typical of the Trump administration. “The confusion, saying one thing and then changing your mind, is a feature of the Trump administration. It’s not a bug. And I think people need to consider this more carefully when judging Trump’s comments,” he says.
In terms of the impact on the market outlook, Mehta comments, “what you’ve seen even more closely is a shift away from the US and a rotation into non-US regions. The UK has had a pretty good year so far and it’s up over 7% year to date (at the time of interview in early June).”
He adds: “Since the start of the year, the uncertain environment coupled with the cheap Cyclically Adjusted Price-Equity (CAPE) valuation and the more defensive, low-beta nature of the UK equity market supported its outperformance against the US. But as the dust settled and tariff risks watered down, the performance of the UK softened. There’s been a shift again, from being defensive, back to cyclical regions such as the EU or the US in recent weeks, and it means that US valuations look stretched once again.”
Mansion House Accord: the potential rewards
Government policies are also affecting the market outlook, and Mehta says he is “particularly interested in” the Mansion House Accord. This has seen pension providers in the UK pledging to invest at least 10% of their defined contribution (DC) default funds in private markets by 2030, with 5% of the total allocated to the UK.
Mehta notes that the initiative started off as being voluntary but could become a compulsory investment within the UK. “There are two sides to this,” he says. “On one hand, investors are being encouraged to put money to work – so there needs to be a clear pipeline of investable projects. The government says it’s ready, pointing to its 10-year strategic infrastructure plan, which includes roads, transport, green energy and digital infrastructure. That’s promising, as long as these projects actually materialise and become viable opportunities for investors.”
But if not enough projects are available, the initiative “can’t work”.
Mehta adds: “I think encouraging more investment is the right move, it’s crucial for long-term growth. There are pros and certainly cons to forcing investors to do it, however. But if it succeeds in getting projects off the ground, it could help the country as a whole. It can start to spur on some GDP growth and increase our productivity capacity, which is very important from a supply-side perspective.”
For the investment strategist, it is all about incentives if a non-voluntary initiative is to work. “If you want investors to invest more in the UK, because you want the money to remain domestically, as opposed to spending on foreign opportunities, then the incentives to find a higher return should be available,” he says.
These incentives could include tax breaks or subsidies, to increase the rate of return that pension funds or long-term investors can have by investing in the UK over anywhere else. “That automatically drives the behaviour,” Mehta adds. But he warns that subsidy-type incentives are currently unaffordable to the UK.
“So, the government will have to push investors to do it another way, which is more regulation, as opposed to through incentive. If it works successfully, and we get the growth and better infrastructure, then it could be a very good thing for everybody. There’s potentially a lot of reward for the risk taken – at least in the near term. Having said that, the longer-term view must also be noted: too much government repression and co-opting of investments could deter investors and capital could flee the country as a result. A balanced approach is necessary,” he says.
Long-term outlook
Assessing CCLA’s long-term outlook for the UK, Mehta says one major theme that is likely to play out is demographics. With an already ageing population and possible limits on immigration, there could be a natural reduction in the pool of resources that are available.
“If you start to reduce that pool of resources, you’re going to put pressure on wages,” Mehta says. “That could lead to two things; either inflation, which then plays itself out in wages and price levels, or you’ll reach a point where businesses say, ‘I need to shift my capital, from labour to investment, to make things more efficient’.”
That could be very important, he thinks, as business investment has been lacking and is one of the aims of the current government.
“On one hand, that could be seen as a positive move. However, it’s important to remember that capital investment is a long-term strategy,” he adds. “Returns take time to materialise, it could be several years before we can reap the benefits”
But, on the other hand, “if you start to accept more people through immigration who can immediately go into the workforce, they can start to produce output right away and contribute towards taxes. So, I think they’ve got to strike the balance,” he says.
Turning to strategic investments, Mehta says that because the government has such high levels of debt, “it’s going to be difficult for them to continue spending”. He therefore expects more private-public joint venture initiatives, “or at least environments being created for more private investment houses to come in and invest in certain parts of Britain. We may even see foreign money come in if they really want to be bold and risky.”
In the short term, Mehta reports that the labour market has been “easing”, unemployment is “just starting to rise”. Wages are “softening but still have some way to normalise – it’s not unhealthy.”
He comments: “The consumer has been saving for a long time now; the saving rate for the UK has remained over 10% over the last few years, when the long-term average was about 8%. While the lack of consumer confidence could be one cause, so are interest rates. It is likely we are in a Wicksellian disequilibrium, where the current interest rates favour saving over spending. Separately from a government perspective, they would prefer lower yields to better afford their borrowing without being worried about breaking fiscal rules.”
Mehta thinks that the Bank of England cutting their rates can support all three areas. He says: “From a labour market perspective, cutting rates means it’s easier for corporations to meet their debt servicing costs; it makes it less likely they need to fire people to maintain their margins, it’s supportive for the labour market. From a household perspective, cutting rates can reestablish a Wicksellian equilibrium – a reduction in mortgage and credit card costs can build consumer confidence, reduce the attractiveness of saving products and push the average household back towards spending. Similarly, as we discussed earlier, from a government perspective, a reduction in the policy rate could naturally drag down rates at the long end of the yield curve, reducing the government’s borrowing cost and their constant battle with the headroom.”
CCLA Market Barometer
To keep up with the ever-changing market landscape, CCLA has started producing a free monthly Market Barometer, which Mehta describes as “flagship research carried out by CCLA’s asset allocation desk.”
The barometer, which is produced for professional investors but is also available on request, contains macro themes around inflation, interest rates and growth, as well as our views across the major asset markets: equities, bonds, alternatives, property and cash.
The latest CCLA Market Barometer is available on CCLA’s website. If you would like to receive this on a monthly basis please contact CCLA at [email protected]
Sidhant Mehta is an investment strategist at CCLA, his views are his own
