What’s next for UK markets?
It’s a well known fact that the UK stock market has underperformed in recent years. And 2020 was no exception. The FTSE 100 suffered its worst decline since 2008. And to top things off, across the past year UK investors withdrew nearly £10 billion out of UK equity funds.
Three general elections within four years, along with the uncertainty of the Brexit process has made life difficult – not forgetting the arrival of the pandemic last year. In terms of uncertainty, UK markets have had a rough ride. So rough in fact, that between the Brexit referendum in June 2016 and October 2020, a total of £31 billion was withdrawn from UK equity funds.
A change in fortunes on the cards?
The good news is that there are signs to suggest investor sentiment is starting to turn. It’s been a good start to 2021 for UK markets, with the FTSE 100 having its best ever start to a year. In the first five trading days of 2021, the FTSE 100 climbed 6.4% – beating the previous record of 4.5%, set in 1999. That year, the FTSE went on to increase by an impressive 17.8% over the subsequent 12 months.
For the first two and half weeks of January 2021, the FTSE 100 gained 4.3%. It was even able to outperform the S&P 500 and the Stoxx Europe 600 index. The last time the FTSE’s gains outpaced those of the American and European benchmarks were pre-Brexit days, back in 2016.
There’s no doubt the UK has been ravaged by the pandemic, and the economy is not expected to be back up at pre-pandemic levels for some years – which is why it’s important to stay grounded. However, there’s a growing sense among investors that the UK stock market could be about to turn a corner.
Why the change in sentiment?
Of course, Brexit has been a big factor. Signs sentiment was first changing occurred towards the end of December, when UK markets experienced their first turn in fortunes. The FTSE 100 closed at its highest point since March 2020, as investors celebrated the post-Brexit trade deal struck on Christmas Eve.
Markets hate uncertainty, and that’s exactly what an unsolved Brexit offered up to the UK over the four years negotiations lingered on for. The agreed deal finally made it clear to investors what the UK’s relationship with the EU would look like in the near future. Putting aside whether it was a good or bad deal in its finer details, investors generally felt a sense of relief over an agreement finally being reached.
Most importantly, the prospect of a no-deal Brexit was removed – a potential scenario which had been looming over markets for some time.
Vaccination programme part of the cure
Hopes for a successful vaccine rollout – and in turn the full reopening of the economy – is also having a large part to play. At the time of writing, approximately 10 million people have been partly vaccinated against the virus in the UK – a promising pace of immunisation.
The UK market is made, for the most part, from cyclical companies (which tend to do better when activity and the economy are healthy – airlines, leisure and hospitality). Understandably, when the virus hit and the economy came to what was a near enough halt, the UK struggled.
It’s these types of companies though which should bounce back most in the event of a recovery. And at the moment the data looks promising.
The Lloyds Bank UK Recovery Tracker – which provides insight into the shape and pace of the UK’s recovery following the huge disruption caused by the pandemic – has found that eleven of the fourteen sectors monitored by the tracker anticipate stronger output growth than their global peers over the next 12 months – owing mainly to the vaccination programme.
If anything, this only demonstrates the huge reliance on the vaccination programme to be successful – not just for the health of the nation, but for the health of the economy as well.
Undervalued as well as unloved
All the while, recently the UK stock market has looked undervalued as an investment option. UK shares are currently perceived to be more keenly priced relative to global shares, than they have been at any time in the past 25 years. It’s cheaper now relative to global shares than it has been in the last 25 years. Credit Suisse estimates that UK shares could be as much as 31% undervalued – that alone makes UK companies attractive.
The global market has been dominated by shares of American tech companies that are expensive to buy into. Given the prospect of an economic recovery, cheap stocks in industries that tend to do well during economic boom times are starting to pose as an encouraging alternative for investors.
Better days are coming?
Among the best performing investments in November were those with disappointing records in recent years – like those value and cyclical companies which make up much of the UK market. In some cases, it took only two days to recover months of poor returns.
A recent survey by the Association of Investment Companies showed that some UK equity fund managers consider Brexit to be a turning point for domestic stocks. That’s despite the current headwind of the most recent lockdown. Some think it could be a catalyst for interest to divert back towards UK shares.
There’s no doubt that glimmers of light are starting to shine through, and the optimists out there are hoping the recent gains are a sign of what’s to come.
Our principles for investing haven’t changed
Finally, it appears the UK market has had a well-needed change in fortune. And we can only hope this is an investor sentiment that continues to thrive.
“However, there are still clouds on the economic horizon for the UK. Uncertainty carries on as the nation – and the world – continues to battle against the virus. Even on a global front, there’s no doubt the pandemic is still dominating stock market sentiment. Short-term performance for UK markets is highly dependent on the success of the vaccine rollout, and recent gains could easily be undone by signs of delays in manufacturing, distribution or a substantial rise in infections."
Remember to focus on the long-term
Truth be told, nobody knows exactly what’s going to happen this year – and it would be foolish of us to even try and predict. But that’s why we always recommend you hold a diversified portfolio, with a mix of asset classes from several different regions – that way, you’re prepared for different eventualities.
We'd also like to take this opportunity to remind you of our number one rule for investing here at Skipton. It's important to stay calm and keep your long-term goals in mind. As always, if you have any questions about your investments please get in touch.
Our recommendations are likely to include stock market-based investments. These aren’t like Building Society savings accounts as your capital is at risk and you may get back less than you invested. The value of your investments and any income from them may fall as well as rise. Past performance is not a guide to future returns. Please bear in mind that the economic and market conditions experiences in the past may not be repeated in the future.