Less than a year after losing its position as Europe’s largest equity market to Paris, London appears poised to reclaim the title as the rally in French luxury shares falters.
The combined market capitalization of primary British listings, measured in dollars, currently stands at $2.90 trillion compared to France’s $2.93 trillion, according to a Bloomberg index. The gap between the two has been steadily narrowing, primarily due to the decline in France’s value from last year’s record of $3.5 trillion as economic uncertainty in the crucial Chinese market deepens.
London, on the other hand, is witnessing signs of investor optimism for the first time in years, with strategists from HSBC Holdings Plc, Barclays Plc, and JPMorgan Chase & Co. all predicting upside potential for a market that has been overshadowed by Brexit concerns. This represents a significant change in sentiment from last year when a Bank of America Corp investor survey ranked the UK as the most disliked market globally.
Barclays’ strategist Emmanuel Cau believes that the UK market is currently a “good place to hide” and expects that exposure to the energy sector and easing inflation could attract significant investment inflows. Max Kettner, HSBC’s counterpart, recently turned bullish on UK equities for the first time since May 2021. So, what factors are contributing to the UK’s positive outlook? Firstly, its stocks are benefiting from a 30% surge in oil prices over the past three months. Secondly, inflation is finally cooling down, which could potentially allow the Bank of England to end its 22-month policy-tightening cycle. This, in turn, could weaken the pound against the dollar, which is crucial for an index that is heavily reliant on exports. Recent data from Bank of America showed that outflows from UK equity funds are still ongoing, reversing a brief period of gains in mid-September. There is certainly room for investors to increase their positions in the UK, as global funds still have a net 22% underweight exposure to the market, making it the most bearish position in almost a year, according to a survey by Bank of America. “The advantage of the UK market is that it is heavily weighted towards energy stocks, which have been performing relatively well,” said Susana Cruz, a strategist at Liberum Capital Ltd. The energy sector accounts for 14% of the FTSE 100 index, and Bloomberg Intelligence data suggests that analysts expect the industry to contribute 20% of the index’s earnings this year.
One of the FTSE’s leading oil stocks, Shell Plc, is currently close to its five-year high. This peak in 2018 coincided with an oil price of $75 per barrel. If forecasts of $100 oil are accurate, the FTSE 100 could see a significant increase.
The situation in Paris is different, as the city is feeling the impact of China’s economic slowdown. LVMH, L’Oreal SA, Hermes International, and Kering SA together make up nearly a fifth of the CAC 40 index and were the driving force behind the earlier rally this year. However, all of these companies have experienced declines from their earlier highs, as analysts warn of a potential slowdown in demand for luxury goods in China and Europe.
Meanwhile, the pound has depreciated by about 4% against the dollar this month, which is advantageous for FTSE 100-listed companies that generate approximately 75% of their sales overseas. Strategists at Goldman Sachs Group Inc. anticipate that pound weakness will continue to benefit exporters.
Despite these positive developments, London still faces challenges, including a sluggish economy and companies opting for share listings in New York. Barclays’ analysis of EPFR data reveals that outflows from the market have been persistent, totaling $23 billion year-to-date.
Years of decline have made London-listed shares significantly undervalued compared to their counterparts. Based on the forward price-to-earnings ratio, the FTSE 100 is currently trading at a 35% discount to the MSCI World Index.
“For quite a while there has been a real UK discount, we see that discount sort of baked into prices,” said Dan Kemp, the chief investment officer at Morningstar, which manages $295 billion. “From that fair-value perspective, the UK is certainly a more attractive market than some others.”