Posted on Nov 29, 2020 at 10:00 a.m.
Between London and Brussels, the markets have already made their choice. Investors have shifted away from UK equities. The FTSE 100 shows a decline of 16% in 2020, much stronger than its neighbors. It is down around 10 points compared to European equities. A fundamental trend, already visible since the referendum. The main British stock index has largely stagnated since the start of 2016 (+ 1.4%), while the CAC 40 climbed more than 20% over the period.
The renewed interest of international investors in British equities which began at the end of last year has fizzled out. The flows reversed in the spring of 2020, when London rejected any extension of the transition period and when the coronavirus hit the country hard. Since then, even the English have turned away from their market. They withdrew more than £ 1 billion from UK equity funds in October, a rare disavowal, according to fund distributor Calastone.
“Investors voted with their feet”, emphasizes its market director, Edward Glyn. “The fact that UK-focused funds suffer much more than their European counterparts suggests that investors consider the double blow of covid and Brexit particularly damaging in the UK”, he adds.
Of course, the UK market has suffered from its sectoral composition. Very little exposure to technology, it retains many heavyweights in the financial sector and raw materials, including Shell and BP, both down more than 40% this year. This bias is all the more detrimental to the attractiveness of the English market as the popularity of responsible management explodes.
Even recently, as industrials and banking stocks rebounded strongly in November, the FTSE remains lagging behind. It climbed 13.5% this month as the Euro Stoxx 50 jumped 19%. The underperformance of UK equities is such that some now see it as an opportunity, regardless of the outcome of Brexit negotiations.
“Shot to play”
The United Kingdom “Is close to its historic low relative to global equities, even after accounting for differences in sector weighting”, note analysts at Morgan Stanley. In short, it is easier to find quality stocks there at a discounted price than elsewhere in Europe. They are betting on a 17% rebound in the FTSE next year, against 10% for European stocks.
Arguments that are far from convincing everyone. “Investors’ aversion to the English market will not go away overnight”, warns Emmanuel Cau of Barclays. “Many unknowns remain on the future trajectory of the economy”, he adds. The equity strategist expects the UK market to rebound next year, especially in small caps, but less significant than in Europe. “Some may believe that there is a blow to be played if the negotiations are successful, but in any case the British economy will emerge weakened from Brexit”, supports Gilles Guibout, European equities manager at Axa IM.