Stock market analysts believe a combination of Brexit uncertainty and the impact of the Covid-19 pandemic has resulted in the UK’s FTSE 100 benchmark index behaving more like an emerging market than one of the world’s leading equities markets. Volatile lockdown policies and the slashing of dividends this year by London-listed companies that used to be among the most reliable income stocks in the world have added to the a lack of clarity around the state of the UK economy in the aftermath of Brexit.
Political uncertainty is typical of emerging markets in regions such as southern Europe, Asia and Latin America. But until recently something the UK would have considered a problem reserved for less mature democracies. That no longer appears to be the case, with Mark Mobius, a former fund manager at Franklin Templeton who launched one of the first British-based emerging markets funds 30 years ago commenting:
“The UK is beginning to behave like an emerging market in terms of the political uncertainty. The lockdown policies are contributing to this. The political situation has deteriorated, with more polarisation and less reliability in general.”
All of these are characteristics Mr Mobius, who now runs his own asset management firm, is more used to seeing in emerging markets nations. The worry is that he also says they create “a vicious cycle that is difficult to stop”.
Before the coronavirus pandemic, Brexit had been a drag on the FTSE 100 and London-listed stocks more generally. Their valuations over the past few years have lagged those of peers in not only the USA but also in Europe and other developed markets. That sluggishness has again been apparent in the recovery from the March coronavirus sell-off. Over the months since, the S&P 500 has recovered all of its losses and now sits around 4% higher. Germany’s DAX index and the Topix in Japan are still down but only by around 4% each.
The LSE is, meanwhile, still 23% off regaining March’s losses. That places it between the performance of the Russian stock market, down 31%, and South Africa’s, down 21%. Hong Kong’s Hang Seng has fared considerably better than the FTSE 100, now down just 16.7%. Like the Russian stock market, London has a heavy weighting of large energy companies.
The main problem for the FTSE 100, say analysts, is a lack of high growth companies, particularly in the technology sector. Much of the gains on Wall Street are down to the USA’s technology giants. But even if they are stripped out, the S&P 500 is flat, not down. The UK’s biggest technology companies, such as chip maker Arm Holdings, Imagination Technologies, another semiconductor company, and Worldplay, the payments tech company, are all under foreign ownership.
Another factor impacting London’s stock market performance is the volatility of the pound, which is proving very sensitive to Brexit news. Dropping on worries for a no deal Brexit and strengthening when optimistic news filters out.
The good news is that while most analysts expect 2021 to remain ‘bumpy’, there is a belief that by 2022 dividends will return and if there is positive post-Brexit economic traction and progress on international trade deals, UK equities could make up ground and start to compensate for several years in the doldrums. Some new British technology champions wouldn’t hurt either!