UK Stock Market Poised to Overtake Paris as Europe’s Largest Equity Market
Less than a year after losing its title as Europe’s biggest equity market to Paris, London is on the verge of recapturing the crown thanks to a faltering rally in French luxury shares. According to an index compiled by Bloomberg, the combined dollar-based market capitalization of primary British listings now stands at US$2.90 trillion, compared to France’s US$2.93 trillion.
This narrowing gap between the two markets is primarily driven by France’s declining value, which has fallen from a record high of US$3.5 trillion in 2022, largely due to economic uncertainty in the crucial Chinese market. On the other hand, London is showing signs of investor optimism for the first time in years, with strategists from HSBC Holdings, Barclays, and JPMorgan Chase & Co all predicting upside for the market.
Emmanuel Cau, a strategist at Barclays, believes the UK market is currently a “good place to hide” and expects that energy exposure and easing inflation could lead to significant investment inflows. Similarly, Max Kettner, HSBC’s strategist, has turned bullish on UK equities this week for the first time since May 2021.
Two key factors are driving the UK’s positive performance. First, British stocks are benefiting from a 30% rally in oil prices over the past three months. Second, inflation is finally cooling, which could potentially allow the Bank of England to end its 22-month policy-tightening cycle. This, in turn, could lead to a weaker pound against the dollar, benefiting exporters’ stocks that dominate the index.
While data from Bank of America (BofA) shows that outflows from UK equity funds are still occurring, there is room for investors to increase their UK positions. Global funds are currently underweight on the market by a net 22%, the most bearish position in almost a year according to a BofA survey.
“The advantage of the UK market is that it is heavily weighted on energy stocks, which have been doing relatively better,” explained Susana Cruz, a strategist at Liberum Capital. The energy sector represents 14% of the FTSE 100, and analysts expect it to generate 20% of the index’s earnings this year, according to Bloomberg Intelligence data.
One notable example of a FTSE blue-chip oil stock is Shell, which is currently trading near five-year highs. If forecasts of $100 oil are accurate, the FTSE 100 could see even further gains.
This positive outlook for London contrasts with the pressure faced by Paris due to China’s economic slowdown. Luxury brands such as LVMH, L’Oreal, Hermes International, and Kering, which together make up almost a fifth of the CAC 40 index, have seen a decline in their share prices. Analysts warn that demand for luxury goods, including handbags and jewelry, is likely to slow in China as well as in Europe.
Furthermore, the pound has weakened by about 4% against the dollar this month, which is crucial for FTSE 100-listed firms that generate approximately 75% of their sales overseas. Strategists at Goldman Sachs Group predict that the pound’s weakness will continue to benefit exporters.
Despite these positive developments, London still faces challenges. Its economy remains sluggish, and companies are increasingly choosing New York for their share listings. Outflows from the market have been relentless, totaling US$23 billion year-to-date according to Barclays’ analysis of EPFR data.
However, years of decline have made London-listed shares comparatively cheap. The FTSE 100 currently trades at a 35% discount to the MSCI World Index based on a forward price-to-earnings ratio.
“For quite a while there has been a real UK discount, we see that discount sort of baked into prices,” said Dan Kemp, chief investment officer at Morningstar. “From that fair-value perspective, the UK is certainly a more attractive market than some others.”
More detail via The Straits Times here… ( Image via The Straits Times )