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The UK to enter the economic doldrums
ETF Securities Macro & Equities Research: The UK to enter the economic doldrums
Highlights
- A combination of weaker loan growth, sterling weakness, squeezed corporate margins and negative real wages are likely to push the UK into a period of very low growth in the coming year.UK corporates have seen a substantial deterioration in interest cover, and falling earnings caused by a weakening economy are likely to exacerbate the deteriorating economic growth outlook.More cyclical sectors such as mining tend to be much more vulnerable, as does the real estate sector, which tends to decline by 4% over a 6-month period.
Our UK business cycle indicator
The UK’s economic growth prospects have come in to question in recent months after tense Brexit negotiations. Looking at the economy since the UK exited recession in February 2010 it has certainly been the weakest recovery of the 5 post recession recoveries since the 1950’s, but by no means the longest one.
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We see evidence of weakness in the UK economy but this isn’t evident in the current GDP growth figures. We believe that due to the uniqueness of Brexit and its potential impact on the business cycle and currencies it is necessary to have a more focussed economic growth indicator. Consequently, we have developed our own economic barometer that focusses on the business cycle, corporate margins, loan growth and wages to measure turning points in economic data.
Using a combination of the well-known Conference Board Leading Economic Indicator (LEI), consumer price inflation less producer price inflation (CPI-PPI) to capture corporate margins, the British Bankers Association (BBA) loan growth data and real wage growth, it has successfully captured the business cycle.
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Our business cycle indicator is not entirely correlated with GDP growth, typically taking longer to recover than GDP growth, we believe this reflects the delay in looser monetary policy transmitting into the corporate lending environment. For example, it wasn’t until the introduction of the second and third rounds of quantitative easing in 2011 and 2012 that the UK lending environment began to markedly improve, and therefore the business cycle improve.
We can blame Brexit
Sadly, this economic improvement looks to be coming to an abrupt end – our cycle indicator immediately began deteriorating in March 2016, after the first set of data became available following the announcement of the EU referendum. BBA loan growth began to weaken and the LEI began to flatten. Furthermore, the weaker sterling, caused by the Brexit vote has pushed up producer prices, forcing import costs higher and consequently squeezing corporate margins. We have also seen further declines in loan growth leading to a steady decline in the UK’s growth prospects. Higher inflation has also put further pressure on wages, with real wage growth now being negative for the fourth month in a row, further constricting consumers’ spending power.
Alarmingly, our business cycle indicator now suggests the UK could slip in to a period of very low growth in the coming year. We believe only a continued strong recovery in sterling, a recovery in loan growth and wage growth would turn around the UK’s fortunes. We are reluctant to state that a recession is likely at this point as it remains very unclear how the Brexit negotiations will play-out.
The market implications
In our report, Vulnerabilities exposed by rising interest rates, from a regional perspective we find, like households, that Europe and the US have the healthiest interest coverage ratios, while UK corporates have seen a substantial deterioration in interest cover, having falling from 9x in 2012 to just 3.4x today. The FTSE is therefore much more vulnerable to interest rate rises and falling earnings caused by a weakening economy, potentially exacerbating the economic growth outlook. Within the UK, we find the most vulnerable sectors are resource and property related sectors.
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Historically FTSE 350 performance has varied at various stages through the economic cycle. Breaking down the cycle in to four components, we find distinct performance differences within sectors. The FTSE 350 tends to perform the best when the business cycle is negative but is beginning to rise and performs the poorest when the cycle begins to rollover after a period of strong economic performance.
The countercyclical nature of equity market performance is due to the bubble of optimism popping, when equities are usually over extended from a valuation standpoint. Valuations at the beginning of 2017 were at their highest since the credit crisis but the recent weak sterling has increased valuations due to inflating overseas source earnings.
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We see the positive impact of currency on equity valuations as transitory. Our cycle indicator highlights the UK growth outlook is deteriorating and is likely to turn negative, and in such a scenario the FTSE350 has historically risen by 2.2% over a 6 month period. The best performing sectors at this stage tend to be defensive sectors such as utilities and defence contractors and those sectors that can deliver cost efficiencies for corporates such as software and computer services.
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More cyclical sectors such as mining tend to be much more vulnerable, as does the real estate sector, which tends to decline by 4% over a 6-month period. These also happen to be the sectors which are the most over-leveraged from an interest coverage perspective.
We believe the UK’s economic growth prospects are very contingent on economically beneficial negotiations with the EU and a very cautious approach from the Bank of England, as a policy error or a bad deal could tip the UK into recession.
For more information contact:
ETF Securities Research team
ETF Securities (UK) Limited
T +44 (0) 207 448 4336
E info@etfsecurities.com
Important Information
This communication has been issued and approved for the purpose of section 21 of the Financial Services and Markets Act 2000 by ETF Securities (UK) Limited (“ETFS UK”) which is authorised and regulated by the United Kingdom Financial Conduct Authority (the “FCA”).
• $TRUMP & $MELANIA: The launch of both memecoins dominated headlines, with $TRUMP reaching a $73B fully diluted valuation. These launches are indicative of a late-stage bull market, often characterized by speculative exuberance.
• Solana Continues to Outperform: Solana reached an all-time high of $286, cementing its role as the leading blockchain for retail activity due to its high performance, low costs, and user-friendly ecosystem.
• Solana Remained Robust: Despite congestion and the rate of failed transactions rising by 20%, the network remained stable compared to prior years, avoiding outages even under unprecedented demand.
• Bitcoin Quietly Hits ATH: Ahead of the inauguration, Bitcoin surged to a new ATH just shy of $109K, largely under the radar amidst the memecoin frenzy.
• DeFi Momentum Builds: Trump’s World Liberty Fund continued its aggressive crypto accumulation, totaling $350M in cryptoasset holdings. This signals potential regulatory leniency for DeFi under the new administration.
• A New Crypto Era Dawns: With crypto-friendly cabinet nominees, initiatives such as the Bitcoin Strategic Reserve (BSR), a Presidential Crypto Council, an SEC-driven crypto task force, and moves to simplify regulations, the administration signals its intent to foster innovation while solidifying the U.S.’s leadership in the cryptoasset industry.
The crypto market surged in anticipation of Trump’s inauguration, especially following the launch of his official memecoin, $TRUMP, in the early hours of Saturday. The token’s fully diluted valuation soared to $73B, attracting around 850K holders and significantly boosting Trump’s net worth in Solana-based assets. Following this, First Lady Melania Trump introduced her own memecoin, $MELANIA, on Sunday. It briefly reached a market cap of approximately $2B before experiencing a 75% retracement, as seen below in Figure 1. The frenzy surrounding these tokens propelled Solana to reach an ATH of around $286 as investors rushed to buy the asset and participate in the ecosystem. However, it’s important to remember that this level of market exuberance typically signals the late stages of a bull market, warranting a more strategic approach from investors. Nevertheless, while vigilance is called for, it’s crucial to recognize that markets still have room for growth, particularly as asset prices often exhibit explosive upside movements in the latter stages of a bull market.
Figure 1: TRUMP & MELANIA Price Performance
Source: 21Shares, Dune
Despite $TRUMP’s questionable tokenomics and potential risks for inexperienced investors, its launch likely signals a shift toward a more crypto-friendly regulatory environment under the new administration. Further, the token’s controversial success highlights memecoins’ role as an effective tool for onboarding crypto newcomers. Unlike complex blockchain projects, memecoins offer a simpler entry point into the crypto world. They can serve as a ”trojan horse,” attracting retail investors with their accessibility and cultural appeal. This initial engagement can then potentially lead users to explore more sophisticated aspects of the crypto ecosystem, including decentralized finance (DeFi) applications and AI-based projects.
That said, their extreme volatility poses significant risks as inexperienced traders may suffer losses from the tokens’ wild price swings, potentially discouraging them from further engaging with crypto.
Despite the mixed short-term and long-term effects, last week’s events revealed a clear beneficiary: Solana. Thanks to its high performance and low costs, the network has now cemented its position as the go-to platform for retail activity. Despite intense usage over the weekend, it avoided typical outages seen in 2022 and 2023, demonstrating improved stability. While some applications, like Coinbase and Phantom, faced challenges with unprecedented demand, causing temporary transaction failures to increase by almost 20%, as seen below, Solana’s network remained robust compared to previous years. What’s worth remembering is that Solana’s resilience during this surge of activity, marked by zero outages, bodes well for its ambitious goal of becoming the ”NASDAQ on the Blockchain.”
Figure 2: Solana Failed Transaction Rate
Source: 21Shares, Dune
It’s worth noting that Solana’s robust performance during this activity surge, handling up to $45B in transactions on January 20 without any outages, demonstrates the network’s progress towards their North Star of becoming ”NASDAQ on the Blockchain.” This feat is particularly impressive when compared to Nasdaq’s average daily volume of $120B, underscoring Solana’s growing capacity to handle significant financial throughput.
As depicted below, even with a significant fee increase, Solana maintains cost-effectiveness, reinforcing its appeal to retail users. However, it’s crucial to look beyond its association with speculative activities. The network is now making significant inroads in diverse sectors, demonstrating its versatility and real-world utility. Notable examples include Decentralized Physical Infrastructure (DePIN) projects like Helium, Render, and HiveMapper; AI initiatives such as Griffain and Ai16z; and tokenization efforts supported by traditional financial institutions, including Franklin Templeton, Hamilton Lane’s SCOPE, and Ondo Finance. This broad spectrum of applications underscores Solana’s potential as a robust platform for innovation across multiple industries.
Figure 3: Solana Transaction Fees
Source: 21Shares, Dune
Similarly, Trump’s endorsed DeFi initiative, World Liberty Financial, has steadily expanded its cryptoasset holding over the recent weeks. In its latest round of acquisitions over the weekend, the project added $47M in ETH and WBTC and $4.7M each in Aave, LINK, TRX, and ENA to its portfolio. This takes the total amount of World Liberty’s holdings up to $350M worth of cryptoassets. It is worth noting that the yet-to-launch protocol is staking ETH with Lido, further echoing the idea that Trump is bullish on DeFi and that the industry will likely grow under his administration.
In this context, despite widespread anticipation, crypto was not mentioned in President Trump’s inaugural address or a leaked Republican policy document outlining national priorities. This omission contrasts with earlier speculation that crypto would become a central focus of the administration. However, it’s crucial to maintain a long-term perspective: Trump’s administration remains one of the most crypto-friendly globally, as evidenced by key pro-crypto appointments and proposed policies. In the following sections, we will explore these initiatives and their potential impact on the digital asset industry.
Bitcoin Strategic Reserve
While it may have gone under the radar, BTC also reached a new ATH, just shy of $109K, ahead of Inauguration Day. Relatedly, Trump’s administration has proposed creating a Bitcoin Strategic Reserve (BSR) to position Bitcoin as a critical financial and strategic asset, similar to gold reserves. The reserve would utilize approximately 80K Bitcoin seized by the U.S. Marshals, redirecting these assets into national holdings rather than auctioning them. Expanding the reserve to a rumored 1M BTC would require Congressional approval for market purchases or over-the-counter acquisitions, potentially funded by U.S. gold reserves.
Figure 4: Theoretical Bitcoin Strategic Reserve If 1M BTC Held Since 2016
Source: 21Shares, Coingecko
The BSR would classify Bitcoin as a strategic asset, held for at least 20 years and only sold to address U.S. debt. Advocates argue this could hedge against inflation, stabilize the dollar, and leverage Bitcoin’s appreciation to reduce national debt. Additionally, it could trigger a global race among nations to accumulate Bitcoin, driving its price higher and positioning the U.S. as a leader in the emerging digital economy. However, such a move would require significant regulatory changes and face challenges like volatility and opportunity costs.
Presidential Crypto Council
Trump’s administration plans to form a presidential crypto council of about 20 industry leaders, including CEOs and founders of major crypto companies. This advisory group would provide insights into the digital asset landscape and help shape innovation-friendly policies while addressing regulatory concerns. Rumored members include Michael Saylor (MicroStrategy), Brian Armstrong (Coinbase), Jeremy Allaire (Circle), Charles Hoskinson (Cardano/Ethereum), and Brad Garlinghouse (Ripple). The council aims to ensure crypto regulation reflects real-world challenges and opportunities, demonstrating the administration’s commitment to industry engagement and positioning the U.S. as a global blockchain leader.
SEC Repeal of SAB 121
A key rumored executive order from Trump’s administration involves repealing SAB 121, an SEC accounting rule requiring companies to treat client cryptoassets as balance sheet liabilities. This repeal would:
- Reduce operational risks for firms
- Encourage broader institutional participation
- Accelerate crypto service adoption in finance
- Signal a business-friendly regulatory approach
By easing regulatory friction, this move could enhance U.S. crypto firms’ competitiveness and position the country as a global leader in cryptoasset custody and management.
SEC and CFTC Joint Collaboration on Crypto Market Structure
Another key executive order reportedly under consideration by Trump’s administration involves directing the SEC and CFTC to collaborate on a crypto market structure bill, building on the foundation laid by the FIT21 framework. This initiative aims to establish a unified regulatory framework for digital assets, addressing long-standing jurisdictional ambiguities that have left cryptoassets caught between classifications as securities or commodities. The bill would create clear and consistent rules by fostering cooperation between these two agencies, reducing regulatory uncertainty, and fostering innovation.
Ending Operation Chokepoint 2.0: Restoring Banking Access for U.S. Crypto Companies
Trump’s administration plans to address the FDIC’s debanking of crypto companies and end ”Operation Chokepoint 2.0,” a controversial initiative that restricted banking access for the crypto industry with the likes of Kraken, Coinbase, Signature Bank, Paxos, and Binance.US all sharing a similar experience. The administration aims to restore fair treatment and financial access for crypto companies by instructing federal agencies to cease discriminatory practices. This move would provide stability, attract institutional players to the U.S. crypto market, and reaffirm the administration’s commitment to fostering a competitive financial environment.
SEC’s Shift in Stance Could Pave the Way for Expanded Crypto Spot ETPs
A revamped SEC under the new administration is set to redefine crypto regulations, legitimizing the industry and fostering innovation. Clear and fair rules would signal that the U.S. is open for business, attracting top talent and projects. This regulatory clarity is expected to unlock institutional capital as traditional finance gains the confidence to invest in digital assets with legal protections. The SEC’s progressive stance increases the likelihood of approving multiple spot crypto ETPs, enabling broader adoption and integration into traditional investment portfolios. This shift validates the crypto industry and positions the U.S. as a leader in financial innovation. Further, the newly established crypto-focused task force led by Commissioner Hester Pierce is designed to establish clear regulatory guidelines, practical registration paths, and sensible disclosure frameworks for crypto companies. Thus, this new body could help approve a broader range of ETPs.
Trump Cabinet Members
While Trump’s proposed appointees are yet to go through Senate approvals, here’s a quick overview of key pro-crypto members.
• Robert F. Kennedy Jr. (Secretary of Health and Human Services): A Bitcoin advocate who views it as the ”currency of freedom” and hedge against inflation, with most of his net worth invested in Bitcoin.
• David Sacks (Crypto and AI Czar): Early Bitcoin investor and backer of projects like Solana and dYdX, bringing deep expertise to blockchain innovation.
• Paul Atkins (Chair of the SEC): Former SEC commissioner with extensive experience helping crypto-native companies navigate regulatory compliance.
• JD Vance (Vice President): A Bitcoin supporter and venture capitalist with investments in blockchain startups and a crucial advocate for pro-crypto legislative initiatives.
• Elon Musk (Co-Head of D.O.G.E): A vocal supporter of blockchain innovation, holding Bitcoin, Ethereum, and Dogecoin, with Tesla’s $1.5B Bitcoin investment under his leadership.
• Vivek Ramaswamy (Co-Head of D.O.G.E): A vocal crypto advocate and co-founder of Strive Asset Management, Ramaswamy launched the Strive Bitcoin Bond ETF, proposed backing the U.S. dollar with Bitcoin, and champions clear regulations and wallet protections to drive innovation and financial freedom.
• Howard Lutnick (Secretary of Commerce): CEO of Cantor Fitzgerald, managing Tether’s U.S. treasury portfolio while acquiring a 5% stake, and holds personal Bitcoin investments worth hundreds of millions.
• Scott Bessent (Secretary of the Treasury): Founder of Key Square Group, Bessent advocates for balanced crypto regulations and has made sizable personal investments of $250K–$500K in Bitcoin ETPs.
For a deeper dive into their backgrounds and potential impact, check out our full breakdown on our latest blog.
All in all, while Trump did not address crypto in his inauguration speech or through executive orders, he has already begun appointing key figures supportive of the industry. Thus, he is starting to follow through with his promises. It seems he’s headed towards fostering a pro-crypto environment that provides a clearer path for companies to operate within the U.S.
Nevertheless, with the exuberant market activity we’ve seen in the last few days, it’s an opportune time for investors to stay mindful and ensure their positions remain aligned with their long-term objectives and risk tolerance.
What’s happening this week?
Research Newsletter
Each week the 21Shares Research team will publish our data-driven insights into the crypto asset world through this newsletter. Please direct any comments, questions, and words of feedback to research@21shares.com
Disclaimer
The information provided does not constitute a prospectus or other offering material and does not contain or constitute an offer to sell or a solicitation of any offer to buy securities in any jurisdiction. Some of the information published herein may contain forward-looking statements. Readers are cautioned that any such forward-looking statements are not guarantees of future performance and involve risks and uncertainties and that actual results may differ materially from those in the forward-looking statements as a result of various factors. The information contained herein may not be considered as economic, legal, tax or other advice and users are cautioned to base investment decisions or other decisions solely on the content hereof.
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