The British stock market is on the rise again.
London is set to reclaim the title of Europe’s largest equity market from Paris in less than a month, as the rally for French luxury shares falters.
Bloomberg’s index shows that the combined dollar-based capitalization of British primary listings is now $2.90 trillion against France’s 2.93 trillion. The gap has been narrowing steadily between the two, due primarily to a decline in France’s market capitalization from its $3.5 trillion record last year as the economic downturn in China deepens.
London is experiencing investor optimism for the first year. HSBC Holdings Plc. Barclays Plc. and JPMorgan Chase & Co. all predict upside for a long-tarnished market. This is a significant change from last year, when a Bank of America Corp survey of investors ranked UK as the most hated global market.
Barclays strategist Emmanuel Cau believes the UK market offers a good place to hide. He expects energy exposure and easing of inflation could lead to “meaningful” inflows of investment. Max Kettner at HSBC turned bullish this week on UK equities for the first since May 2021.
What’s working for the UK right now? The UK’s stocks have benefited from the 30% rise in oil prices in the last three months. Second, the inflation rate is now cooling and could allow the Bank of England end its 22 month cycle of tightening policy. This could lead to a weaker pound against the dollar. This is important for an index that includes stocks of exporters.
Data from BofA’s latest week shows that outflows are continuing from UK equity funds, after a brief period of gains at the end of September. Investors can add to UK equity positions. According to a BofA report, global funds have a underweight of 22%, which is the highest in over a year.
Susana Cruz, Liberum Capital Ltd.’s strategist, said that the UK market has an advantage because it is heavily weighed on energy stocks. These have done relatively well. Bloomberg Intelligence data indicates that analysts expect energy to contribute 20% of the index earnings this year. The FTSE 100 has a weighting of 14%.
Shell Plc is one of the blue-chip oil stocks on the FTSE. It’s hovering around its five-year high. This peak in 2018 coincided with an oil price of $75 per barrel. If forecasts for $100 oil are correct, the FTSE 100 may be heading much higher.
Paris is being impacted by the economic slowdown in China. The CAC 40 index was driven by LVMH, L’Oreal SA and Hermes International, which together make up almost a fifth. Analysts warn the demand for high-end handbags and jewellery is likely to slow down in China as well as in Europe.
The pound is down about 4% this month against the dollar, which is important for FTSE 100 listed firms that generate 75% of their revenue overseas. Goldman Sachs Group Inc. strategists expect the pound’s weakness to continue to boost exporters.
London’s troubles are not over yet, as the economy is in a rut and companies have fled to New York to list shares. According to Barclays analysis of EPFR data, the outflows have been constant and totaled $23 billion in one year.
London-listed stocks are extremely cheap compared to their peers after years of declines. According to a price-to earnings ratio for the future, the FTSE 100 is currently trading at a discount of 35% compared to the MSCI World Index.
Dan Kemp, Morningstar’s chief investment officer, said that there had been a UK discount for a long time. We see this discount baked into the prices. Morningstar has $295 billion in assets under management. “From a fair-value perspective the UK is definitely more attractive than other markets.”
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