UK stocks are recovering.
Less than a year after losing its crown as Europe’s largest stock market, London looks set to take the crown back from Paris as gains in French luxury stocks falter.
According to an index compiled by Bloomberg, the total dollar market capitalization of major listed companies in the UK is currently $2.90 trillion, compared with $2.93 trillion in France. The gap between the two has narrowed steadily, mainly as France’s value fell from a record $3.5 trillion last year as the economic downturn in the key Chinese market deepened.
Meanwhile, London saw signs of investor bullishness for the first time in years, with HSBC Holdings PLC, Barclays PLC and JPMorgan Chase & Co. strategists all forecasting gains for a market long blighted by Brexit woes.That’s a marked change from last year, when a Bank of America investor survey ranked the UK as Dislike the most Global Market.
Barclays strategist Emmanuel Cau believes the UK market is a “good place to hide” at the moment and expects energy exposure and easing inflation could trigger “meaningful” investment inflows. HSBC President Max Kettner turned bullish on UK stocks this week for the first time since May 2021.
So what is the development trend in the UK? First, its stock has benefited from a 30% rise in oil prices over the past three months. Second, inflation has finally cooled, potentially allowing the Bank of England to end its 22-month policy tightening cycle. That in turn could weaken sterling against the dollar, which is key for an index that includes exporters’ stocks.
Bank of America data for the latest week showed outflows from UK equity funds continued, reversing a brief rally in mid-September. There is certainly room for investors to add to UK positions – global funds’ net positions in the market are still down 22%, according to a Bank of America survey, the most pessimistic in almost a year.
“The advantage of the U.K. market is that it’s focused on energy stocks, which have performed relatively well,” said Susana Cruz, strategist at Liberum Capital Ltd. The energy sector has a 14% weighting in the FTSE 100, while Bloomberg Intelligence Analysts expect the industry to generate 20% of the index’s earnings this year, the data showed.
Shell, one of the FTSE’s blue-chip oil stocks, is currently hovering near a five-year high. The peak in 2018 coincided with an oil price of $75 per barrel. Now, if the $100 oil forecast is correct, the FTSE 100 could move significantly higher.
This is in stark contrast to Paris, which is facing pressure from China’s economic slowdown. LVMH, L’Oréal, Hermès International and Kering account for nearly a fifth of the CAC 40 index and drove gains earlier this year.All have retreated from highs hit earlier this year, analysts say warn Demand for luxury handbags and jewelry is likely to slow in China and within Europe.
Meanwhile, the pound has fallen about 4% against the dollar this month, which is crucial for FTSE 100 companies, which generate about 75% of their sales overseas.Strategist at Goldman Sachs Group Weak pound expected to continue boosting exporters.
London’s problems are far from over, with the economy in the doldrums and companies fleeing to New York to list. Market outflows have continued, totaling $23 billion so far this year, according to a Barclays analysis of EPFR data.
Years of decline have made London-listed shares extremely cheap relative to their peers. The FTSE 100 currently trades at a 35% discount to the MSCI World Index based on forward price-to-earnings ratios.
Dan Kemp, chief investment officer at Morningstar, which manages $295 billion in assets, said: “There has been a real discount in the UK for quite some time and we’ve seen that discount to some extent baked into the price. “The UK is certainly more attractive from a fair value perspective than some other markets.”
Svlook
