Boring UK market eclipses racier rivals

In a sea of red so far this year, one country’s stock market stands tall: the UK’s. It is comfortably the best-performing market in Europe, streets ahead of the US, and it is trouncing most of Asia too.

As a curmudgeonly Brit, steeped in the national tradition for self-deprecation, I feel a duty to spoil the mood by saying this reflects everything that is wrong with the UK stock market.

First, though, the reasons for Team UK to be cheerful.

Across the world, equities have tumbled on intensifying signs that central banks are poised to pull the plug on the pandemic-era largesse that has swept them higher for almost two years. The pain has been most severe in the flakier parts of the US market, particularly in the high-tech Nasdaq Composite, which has fallen 12 per cent in the opening weeks of this year.

By contrast, the FTSE 100 index of British bulldog stocks is up about 2 per cent, or nearly 2.6 per cent in dollar terms to make a cleaner comparison with US indices. Investors are waking up. According to Bank of America’s latest monthly investor survey, fund managers’ net allocation to UK stocks has grown by 9 percentage points since January, making this a top new pick.

What is more, the optimists will no doubt note, that still leaves plenty of potential buyers left to pounce. Even with that scale of a shift, investors are still net underweight the UK relative to global benchmarks, the BofA survey shows.

UBS Global Wealth Management, among others, thinks the rally has further to run, slapping a year-end target of 8,100 on the FTSE 100, another 7.5 per cent above current levels. If that is right, this will be one of the best years since the financial crisis.

“Now is the time to invest in the UK” has been a refrain among analysts and investors for years. It has never worked out, in part because Brexit uncertainty has proven sticky. Instead, diving in to the deep value of UK stocks has been a lesson that, sometimes, assets are cheap for a reason. Maybe this time really is different — the performance so far in 2022 certainly suggests so.

One problem — before everyone gets too carried away — is that it is worth noting the FTSE 100 has only just regained the levels it held two years ago, right before Covid ripped through markets. The Nasdaq, by contrast, is up 44 per cent from that point. For the S&P 500, it is 30 per cent. In Europe, Germany’s Dax and France’s CAC are comfortably in double figures.

Investors are jumping in to the UK now not because the UK has changed, but because they have. Right now, fund managers are unusually miserable. They are looking for a safe room where they can hunker down and see out the global inflation scare.

Bank stocks — typically winners in rising interest-rate environments — are in favour. So are mining and energy stocks. (Just as there are no atheists in a foxhole, and no carb-avoiders in a lockdown, there are few true sustainability evangelists in a wave of inflation.) These are the sectors where the UK excels. The old economy stuff. British American Tobacco is still one of the top-10 companies on the market. Four of the others are in oil or resources.

At a recent online event, I was asked whether drab UK markets were a “corporate old people’s home”. If they are, then clearly investors can see the allure of warmth, companionship and round-the-clock medical care at this testing time. Just 1 per cent of the MSCI UK stocks index are in the technology sector, as UBS points out, whereas nearly a fifth are in financials and 13 per cent in energy. That energy slice of the index is up by an eye-popping 18 per cent so far this year, reflecting a rip-roaring run in oil prices.

This is, of course, fine as long as investors as a whole remain nervous, miserable, or both. In the long term, it is hard to imagine that the UK’s public markets will be an exciting place to put money to work. Earlier this month, Japan’s SoftBank delivered a reminder that for tech listings, the US is still the only game in town, when it revealed plans to list Arm, one of the UK’s rare tech success stories, in New York.

Tech investors and executives have pressed the government to work harder to attract fast-growing companies to the London market, and keep up decent momentum from last year. The London Stock Exchange has boasted that the pace of tech and consumer internet company listings more than doubled in 2021.

Fine. But most of those initial public offerings have done badly, some very badly. The 37 companies also include names that might be more at home in a consumer retail portfolio such as Victorian Plumbing, which describes itself as “the digitally native retailer of bathroom products”, and whisky retailer Artisanal Spirits.

Being an inflation hedge and a somewhat dusty retreat for stocks with questionable sustainability credentials works for now. It is not a great calling card for the long term.



Business Asia
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