An employee views a FTSE share index board in the atrium of the London Stock Exchange Group Plc’s offices in London, U.K., on Thursday, Jan. 2, 2020.
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LONDON — Britain’s FTSE 100 index closed above 8,000 points for the first time on Thursday, with one analyst suggesting the reason behind demand for U.K. stocks is that “boring is the new sexy.”
Despite the U.K. facing the weakest economic growth outlook among all of the world’s major economies, including Russia, the country’s blue chip index hit record highs this week and closed at 8,012.53 on Thursday.
After a rough year in 2022 as soaring inflation, steep interest rate hikes and fading consumer confidence torched stock markets around the world, the U.K market began Friday’s trade up 7.5% so far in 2023, although that remains behind the 9.5% gain on the pan-European Stoxx 600 index.
The FTSE 100 was down 0.25% by mid-morning in London on Friday as risk assets sold off across Europe, though the losses were considerably smaller than those seen in France and Germany.
“Right now, the U.K. and Europe are in an inflation sweet spot; it’s not exactly cooling quickly but it is cooling faster than many had anticipated,” said Danni Hewson, head of financial analysis at British investment platform AJ Bell.
“That’s creating confidence that consumers might just have enough put by to get by; that those controversial profits being enjoyed by those energy giants won’t hang around forever because the price of energy is falling fast.”
The U.K.’s annual headline inflation dipped for a third straight month in January to 10.1%, though it remains well above the Bank of England‘s 2% target while the labor market remains unusually tight.
Euro zone headline inflation also fell for a third consecutive month to 8.5% in January, coming back to earth at a slightly faster rate than in the U.K.
Despite anticipated recessions, U.K. and European economies have thus far managed to slightly exceed expectations and stave off a downturn.
The U.K. has also benefited somewhat from a return to economic stability after the market turmoil seen last year in the wake of former Prime Minister Liz Truss’ ill-fated economic plan.
Meanwhile, mild weather in northern Europe and high levels of natural gas storage have seen the region manage to avert the energy shortages fearer for this winter.
Bumper profits in sectors with heavy weighting in the FTSE 100, such as energy, commodities and financials, have also helped propel the index upwards, along with a weak pound which helps overseas revenues collected in dollars.
The index is heavily comprised of multinational companies with high proportions of dollar-denominated earnings, and offers comparatively high dividend payments for investors.
‘Incredibly cheap’
Yet alongside the short-term market factors catalyzing investment flows into a market that has spent many years in the wilderness, analysts see some more structural shifts in investors’ behavior.
“Despite the new high for the index, U.K. equities remain incredibly cheap with the FTSE 100 trading at a multiple of 10.7 times forecast earnings. This is low both compared to [the] longer-term trend and it is also one of the widest discounts to the rest of the world in living memory,” said Jason Hollands, managing director at online investment platform BestInvest.
“This is a good starting point, indicating the potential for further gains, while U.K. shares also provide an attractive level of dividend yield at circa 4.0%.”
It’s led large investment banks to turn increasingly rosy on the U.K., but many private investors remain skeptical amid a gloomy outlook for the domestic economy.
“In recent years, many investors have dismissed U.K. blue chip shares as ‘boring’, lacking exposure to exciting sectors like technology and social media. But in a more trying economic environment, solid companies churning out reliable dividends are well worth considering,” Hollands said.
“Boring is the new sexy. With an abundance of exposure to energy, commodities, consumer staples and healthcare companies, the FTSE 100 looks well placed for the current environment.”
In contrast, economic resilience in the U.S. is being viewed more negatively on Wall Street, with strong jobs data and falling producer prices interpreted as a signal that the Federal Reserve may continue its aggressive hiking of interest rates.
Too far too soon?
Despite the wave of positive news for Europe and the U.K., not everyone is bullish.
The British government’s planned withdrawal of its energy bill support scheme and lifting of the household energy price cap means the cost of living crisis is unlikely to abate any time soon. Meanwhile, higher interest rates and taxes, reined-in fiscal stimulus and the fallout from Brexit complete an “unpalatable picture,” according to Frederique Carrier, head of investment strategy at RBC Wealth Management.
Carrier also highlighted a risk to corporate earnings, which have been supported in the U.K. and Europe largely by “Covid-19-induced pent-up demand at a time consumers were flush with cash from stimulus efforts.”
“Thanks to this backdrop, corporates were able to pass through higher input costs, lifting margins which are at an all-time high, but the situation has evolved,” Carrier said in a note last week.
“Pent-up demand has largely been exhausted, supply chain disruptions have largely resolved themselves, and inventories have been built up. Corporate pricing power may erode, particularly as there is increasingly widespread evidence of downtrading to cheaper goods.”
As a result, Carrier suggested the “easy” stock market gains may be in the past as the economic backdrop remains challenging, though overall valuations in the U.K. and Europe remain attractive relative to the U.S., which should keep the regions on investors’ radar.
