(Bloomberg) -- A growing chorus of investors are becoming more upbeat on UK assets from the pound to stocks as the economic outlook brightens, even as the country is rocked by floods, storms and strikes.

Goldman Sachs Group Inc. and Bloomberg Economics entered January by raising their growth projections, offering hope for an economy that spent much of the past year in the grip of recession speculation.

In markets, analysts upped their forecasts for sterling and investors recently turned bullish on the currency for the first time in three months. Some are also seeing signs of a turnaround for stocks amid stronger numbers from retailers. 

The bets on the UK outperforming still risk coming unstuck. Ongoing disruptions to transport and health services from weather and industrial action pose threats to demand. If inflation fails to fade further, pressure would also mount on the Bank of England to keep interest rates higher for longer, undermining bonds. 

The pound, which rallied in the final months of 2023 as the dollar suffered, has nevertheless kept up its momentum so far in 2024. As the greenback rebounded against major peers this past week, sterling was the only one to eke out gains. The median forecast in a Bloomberg survey is for further strengthening until the end of the year.

Goldman Sachs last month boosted its pound forecast, predicting a gain to $1.30 in six months instead of a retreat to $1.20, its previous estimate. Fidelity International is even more bullish, betting it will strengthen to $1.40 this year. Sterling was trading around $1.27 on Friday.

“The winner from this should be sterling,” said Stuart Cole, chief macro economist at Equiti Capital in London. It “should benefit from an interest-rate differential that will increasingly move in its favor over the course of the year.”

Evidence of a stronger than expected economy is mounting: UK house prices defied predictions of a slump in 2023 and mortgage approvals also came in better than forecast. Meanwhile, the final services and composite PMI readings for December were revised remarkably higher.

The outlook for consumers and the broader economy is being supported by rising wages in real terms and anticipation of BOE loosening, with five quarter-point rate cuts expected this year. This gives Chancellor of the Exchequer Jeremy Hunt more wriggle room to deliver tax cuts in the run-up to an election expected later this year.

In an interview with the BBC on Sunday, Prime Minister Rishi Sunak said the economy had defied predictions of a recession and “outperformed” other countries, including Germany. Data scheduled for release this coming week is predicted to show the overall economy and industrial production gained in November. 

In stocks, there has also been news suggesting a better economic backdrop. Next Plc — seen as a high-street bellwether due to its mid-market offering — raised its profit forecast after a better than expected Christmas.

Still, analysts at HSBC Holdings Plc offered caution, warning that there could be a decline in spending in the first quarter as consumers “pay back” what they spent over Christmas. 

Meanwhile, Citigroup Inc. strategists led by Beata Manthey have an underweight rating on UK shares, warning this week that higher rates are spurring unemployment, and a weaker dollar and oil price could also weigh on London-listed stocks. 

Even if the economic expansion is looking better than once expected it remains fragile. Equiti’s Cole said growth looks set to remain constrained by high borrowing costs and a still tightening fiscal policy.

For many households, coming out of a brutal inflation squeeze that ripped through incomes, it’s still going to be a grind. And monthly GDP figures for November due this week may show the economy on track for a technical recession —  two straight quarters of falling output — in the second half of 2023.

There’s also going to be a short-term hit in early 2024 as the UK suffers through another series of planned industrial disputes. 

The London Underground will come to an effective standstill for most of this week after talks to avert a strike by the RMT union failed to produce a breakthrough. Junior doctors in England walked out last week as part of a long-running disagreement over pay that saw them take 28 days of industrial action last year.

“The strikes are a sign of a tight labor market,” said Mark Dowding, CIO at RBC BlueBay Asset Management, who is bearish gilts and the pound. “But in the UK case it’s not necessarily a sign of economic strength. Wages are still growing at 7% even though the economy is weak and this adds to inflation.”

For bonds, that means a less buoyant outlook and a delay to any recovery after the mauling of 2023 that sent yields to multi-year highs. 

Citigroup and Natwest forecast benchmark UK yields to top 4% again this year and investors including Federated Hermes Limited and RBC BlueBay Asset Management are bearish on gilts. 

Over the past two years, yields rose from about 1% to as high as 4.75% in August before embarking on a downward trend to about 3.5% toward the end of 2023.

“I’ve just got a little less conviction on the UK now,” said Orla Garvey, senior portfolio manager for fixed income at Federated Hermes Limited, who has reduced gilts exposure after the rally and the repricing of BOE expectations. “That’s done now and I think the outlook is a lot less clear.”

--With assistance from Alice Atkins, Joe Easton, Alice Gledhill and Anchalee Worrachate.

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