Nov 5th 2025|4 min read
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Snap up an asset as its price plummets, and you are “catching a falling knife”. Chase a series of small profits while risking a big blow-up, and you are “picking up pennies in front of a steamroller”. To bet against America’s central bank is to “fight the Fed”; to short-sell Japanese government bonds is to attempt the “widowmaker”.
It feels fitting that another trading strategy—of shunning British assets like the plague—has no slang name. What it does have is a long pedigree. A century has passed since the pound was first overtaken by the dollar as the leading international reserve currency; it now accounts for less than 5% of central banks’ foreign-exchange reserves. London boasts one of the world’s oldest stock exchanges and a market for government bonds, or “gilts”, that helped decide the outcome of the Napoleonic wars. So far this year, bourses that have raised more equity capital include those of Mexico and Oman. In a game of word association, “gilt market” would most likely be followed by “crisis”.
Investors need not search hard for reasons to give Britain a miss. It has the worst inflation problem of any big, rich country, with a headline rate of nearly 4%. The economy has stalled and a government elected on a promise to set it whirring again has yet to suggest credibly how it might do so. Rachel Reeves, the chancellor of the exchequer, gave a speech on November 4th setting out three priorities for her upcoming budget; spurring growth was not one of them. Owing to a chronic overreliance on borrowing, the public finances are in a sorry state and getting worse.
Amid this gloom, you might expect British asset prices to have fallen through the floor. In fact, in a remarkable turn of events, they have been doing well. Britons have plenty of reasons to be worried about their economy and frustrated with their government. Markets nonetheless suggest they could cheer up a little.
Start with the pound. After Britain voted to leave the European Union in 2016 and sterling’s value plunged, traders joked that it had become an emerging-market currency. A few crises later, especially after the one that ended Liz Truss’s disastrous prime ministership in 2022, the description was in danger of losing its irony.
Ever since, however, sterling has been broadly strengthening against a trade-weighted basket of other currencies. A pound bought $1.25 at the start of this year and now buys $1.31. Since the dollar has weakened across the board, that probably owes more to investors’ assessment of Donald Trump’s presidency than to their confidence in Britain. All the same, it says something about Britons’ mood that not having had their currency crater along with America’s was a pleasant surprise.
British stocks have been doing surprisingly well, too. Even measured in their respective currencies, Britain’s FTSE 100 share index has outperformed America’s S&P 500 so far this year. Measured in sterling (to account for the dollar’s weakness) the FTSE has returned 23% against the S&P’s 12%. That performance is all the more impressive when you consider Britain’s conspicuous lack of big tech firms to benefit from euphoria over artificial intelligence. And shareholders are not alone in finding reason to be cheerful. Bondholders’ long-run inflation expectations have fallen substantially, from 3.5% a year to 2.9%. Yields on Britain’s ten-year government bonds, at 4.5%, are higher than those of any other G7 country. But in part because investors are now pricing in lower inflation, they are some way below their peak.
To say that any of this suggests animal spirits are roaring in the City of London would be a stretch. The case against British assets became badly oversold; the pendulum is now swinging back. Still, their outperformance could have some way to run. “Britain’s fiscal situation isn’t ideal,” says Andrew Sheets of Morgan Stanley, a bank. “But where else in the G7 is it that much better?”
He has a point. At over 4% of GDP Britain’s deficit looks bad, but America’s is 6%. France has burned through one prime minister after another while failing to curb its own outsize borrowing. Italy’s deficit is smaller but its existing debts are higher; Japan’s are vastly more so and its borrowing costs are rising fast. Germany’s economy is even more sluggish than Britain’s. Canada’s access to its biggest export market, America, is threatened by Mr Trump’s trade war. Britain’s economy has real problems, and investors are not waving them away. They are telling Britons to look to their neighbours and count their blessings. ■
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This article appeared in the Finance & economics section of the print edition under the headline “Always look on the bright side of life”
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