British stocks have just broken a record. It could be as good as it gets

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UK stocks have just hit a record high, defying the country’s bleakest economic outlook in decades. However, scratch the surface and you will see that the market is already lagging behind.

While the FTSE 100 Index, which includes blue chip stocks such as Shell Plc, HSBC Holdings Plc and Diageo Plc, has finally surpassed its 2018 peak, it is actually lagging behind benchmarks this year in Europe, China and USA. In addition, London recently lost its crown as Europe’s largest stock market to Paris.

The FTSE 100 outperformed most European peers last year, thanks in part to rising oil and gas prices benefiting energy giants BP and Shell. But in the longer term, the UK benchmark has remained largely unchanged since the 2016 Brexit vote in dollar terms, while the S&P 500 has nearly doubled and the Euro Stoxx 50 has gained about 30%.

“Equity investors should look elsewhere for now,” says Vivek Paul, chief investment strategist at BlackRock Investment Institute in the UK. He sees more problems ahead for the country as tighter policies and persistent inflation take their toll on the real economy.

Trends that supported the FTSE 100’s outperforming results last year, such as rising oil prices, a weak currency and rising interest rates, are beginning to weaken or are better accounted for.

Last year, the export-led index shrugged off domestic political turmoil, instead capitalizing on a commodities rally. But strategists at Bank of America Corp. this support is expected to wane as economic growth falters.

Other index heavyweights are also under pressure. While higher rates have spurred the growth of banks in the FTSE 100 over the past year, rising bets that the hike is peaking means upside could be limited from now on. At the same time, a strengthening pound is putting pressure on large-cap exporters who earn in dollars.

A change in investment style could also hurt the FTSE 100’s rise. Investors are pouring into growth stocks after the Federal Reserve reported some progress in curbing US inflation. This is likely to put pressure on the FTSE 100 given that it has “a propensity for deep value and greatly underestimates growth and high-growth stocks,” says Tineke Fricky, head of UK equity research at Waverton Investment Management.

Global investors have been steadily pulling out of the UK stock market since the 2016 Brexit vote, taking London’s advantage as a global financial center with it. At the end of last year, Paris equaled London as Europe’s largest stock market and is now firmly in the lead.

The situation with the locals is difficult. The FTSE 250 Index, whose constituents receive about half of their sales in the UK, remains about 6% lower year-over-year as the UK faces a sharper recession than many developed nations.

However, the mid-cap indicator jumped the most since November on Thursday, widening its lead over this year’s FTSE 100 as traders bet the Bank of England’s latest rate hike will bring it closer to its cycle peak as inflation cools. and recession takes its toll.

Those who argue in favor of UK stocks point out that they are still cheap compared to European and global peers and offer international exposure. The FTSE 100 dividend yield is also among the highest in the world. Among those positive about the stock is David Winkler, senior investment analyst at Kingswood, who notes large valuation discounts that mean the recession is already “largely” priced in.

“As the Brexit hangover wears off and with some political stability, most UK assets look set to deliver excellent risk-adjusted returns over the medium term,” he says, adding that economically sensitive companies look attractive and could well outperform them.

Not everyone is such an optimist. The FTSE’s poor performance against the Stoxx 600 and S&P 500 in January “boosts model of the year,” write Bloomberg Intelligence strategists Tim Craighead and Laurent Douillet, expecting its members’ profits to fall in 2023 and lag behind peers’ recovery in 2023. 2024.

“The FTSE is losing its lead as 2023 begins,” they write. “We believe that its sharp excess of 10-15 percentage points in 2022 is a thing of the past.”

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