(BFM Bourse) – Contrary to the records of the Dax or the pronounced rise of the CAC 40, the FTSE 100, the main index of the London market, is stable or almost. Which is due to the fact that it finished in 2022 in the green as well as to its components.
If the year 2023 was punctuated by ups and downs on the stock market, the major world markets are clearly heading towards a good year. The pan-European Stoxx Europe 600 index is currently up 9% over the whole year.
The DAX 40 gained 20.4% and reached new highs this week both during the session and at the close. The CAC 40 advances by 16.3% and the CAC 40 GR (with dividends reinvested) even gains 19.9%. The FTSE MIB gained 28.3% and the Madrid Ibex 24.2%. The Amsterdam Stock Exchange advances by 13.5%. We won’t even talk about the American indices with the S&P 500 gaining 19.4% and the Nasdaq Composite up 37%. As for the Tokyo Stock Exchange, it gained 28.9%.
An ugly duckling is light years away from these performances: the London Stock Exchange and more precisely its benchmark index, the FTSE 100. The latter shows a timid gain of barely 1.4% this year.
Several elements explain the poor performance of our neighbors across the Channel. It should first be noted that the FTSE 100 had significantly outperformed the other places in 2022 and had little or no ground to catch up, unlike the other stock markets. Last year, the main London index gained 0.9%, while in comparison the CAC 40 lost 9.5%.
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A defensive place above all
This resistance could be explained both by the fact that British stocks are relatively cheap as well as by the relatively defensive nature of the London Stock Exchange. “The UK’s relative attractiveness likely lies in its defensive characteristics,” JPMorgan strategists pointed out in their 2024 outlook published last month.
But in markets that are regaining their appetite for risk, the defensive virtues of a security (or here an index) tend to slow down performance. JPMorgan also notes that British stocks as a whole display a “relatively low beta compared to global stocks”. To put it simply, beta measures the sensitivity of a stock relative to a benchmark. The higher it is, the more this action tends to vary greatly with this index (example: a share which increases by 5% when the CAC advances by 1%). A beta close to 0 means that a stock tends to be not very volatile and to remain sheltered from market turbulence but also from its flashes.
The British macroeconomy also does not really support the London Stock Exchange, with growth expected at 0.5% in the United Kingdom this year and inflation around 7.7%, according to the IMF. If the comparison is not correct, France should post growth of 0.9% and inflation limited to 5.6%, again according to the International Monetary Fund. In June, the Financial Times highlighted that the relatively high political turbulence in the country (even if we have clearly not reached the peak of 2022, when Liz Truss remained barely 44 days in Downing Street) as well as persistent inflation were weighing down the London square.
The absence of tech
But above all, the composition of the FTSE 100 has not helped it move forward. “The UK significantly underperformed due to its underexposure to technology and its orientation towards commodities,” Barclays strategists noted last week, once again highlighting the underperformance British markets in November.
During a year 2023 during which the fever around generative artificial intelligence was the major theme of the markets, the poverty of the FTSE 100 in technological stocks clearly constituted a handicap. Especially since these “tech” stocks also benefited from the end of expectations of increases in key rates from major central banks this year.
We can almost extend the reasoning with luxury, a sector which was on the rise in the first part of 2023, since only Burberry appears in the London index. However, unlike Hermès (+37.2%), Burberry disappointed the market, with a drop of 25% over the whole year, and a profit warning last month. The stock is also not really in the odor of sanctity among analysts, with UBS expressing doubts about its recovery.
Above all, and here again, the large caps of the FTSE 100 do not tick the right boxes in terms of sector. The two large pharmaceutical groups, GSK and Astrazeneca, operate in the defensive sector par excellence, and display either stability (GSK) or a drop in their price (-9.8% for Astra). These two groups have also remained outside the enthusiasm of investors for anti-obesity drugs, a market in which the American Eli Lilly and the Danish Novo Nordisk are clearly one step ahead of the others.
Oil and mining companies not helped by market prices
Major oil groups, such as BP and Shell, have suffered from the fall in oil prices, with Brent falling by more than 11% since January 1. The mining companies Rio Tinto, Glencore and Anglo American posted declines of between 1.4% (Rio Tinto) and 46% (Anglo American) while the prices of many metals have fallen this year.
The specialist in consumer products, Unilever, the fourth largest capitalization in the index, lost 9.5%, having suffered from problems in the execution of its strategy, losses of market share and a certain inertia, noted recently Deutsche Bank and UBS. And the recent investor day of the group’s new management, in October, did not reassure the market. We can also cite Diageo (-22.5%), seventh largest capitalization on the FTSE 100, which operates in the complicated spirits segment, with high stocks and sharply declining American and Chinese markets.
Many banks are also present, while the sector suffers from a certain disenchantment on the part of the market. If HSBC is doing well (+20% since the start of the year), this is much less the case for Standard Chartered (+6%), Barclays (-9.6%) and NatWest (-17%).
“The tepid figures or cautious outlook on lending margins (or both) from Standard Chartered, NatWest, Barclays and Lloyds mean the big lenders remain unloved,” Russ Mould, investment director at AJ Bell, explained in November .
“The five companies (adding HSBC, Editor’s note) are trading on earnings multiples which represent a significant discount compared to the FTSE 100. (…) The markets clearly believe that earnings and dividend forecasts carry significant risks,” he continued.
However, let us note among the satisfactions that the FTSE 100 can boast of counting in its ranks Rolls Royce, the aeronautical engine manufacturer, which will probably sign the strongest growth of large European capitalizations in 2023 (+210% for the moment).
Will the London Stock Exchange be able to catch up next year? Obviously no one has the answer. “The catalysts for a turnaround are rare,” point out the strategists at JPMorgan Asset Management. Furthermore, general legislative elections must be called before December 17, while Prime Minister Rishi Sunak’s conservatives have experienced unfavorable polls in recent years. Which clearly creates a factor of uncertainty.
Julien Marion – ©2023 BFM Bourse