London to become the biggest stock market in Europe again
London is about to become the largest stock market in Europe again – less than a year after losing the krona. The UK stock market is getting back on its feet and reclaiming the throne from Paris, as the rise in French luxury stocks falters.
The combined dollar-based market capitalization of primary UK listings now stands at $2.90 trillion compared with France’s $2.93 trillion, according to an index compiled by Bloomberg. The gap between the two has been steadily narrowing, mainly due to a decline in France’s value from last year’s record $3.5 trillion as the economic gloom in the key Chinese market deepens.
London, meanwhile, is seeing signs of bullish investor sentiment for the first time in years, with strategists from HSBC Holdings Plc, Barclays Plc and JPMorgan Chase & Co. all predicting upside for a market long hurt by the Brexit overhang. It is a marked change in tone 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 the UK market is currently a “good place to hide” and expects energy exposure and reduced inflation to trigger “meaningful” investment inflows. His counterpart at HSBC, Max Kettner, turned bullish on UK stocks this week for the first time since May 2021.
So what is going right for the UK? First, its shares are benefiting from a 30% oil rally over the past three months. Second, inflation is finally cooling down, potentially allowing the Bank of England to end its 22-month tightening cycle. That, in turn, could weaken the pound against the dollar, crucial for an index packed with exporter stocks.
BofA data from this past week showed that outflows from UK equity funds are still continuing, reversing a brief hiatus of gains in mid-September. There is certainly room for investors to add to positions in the UK – global funds still have a 22% net underweight in the market, the most bearish in almost a year, according to a BofA survey.
“The advantage of the UK market is that it is heavily weighted to energy stocks, which have done relatively better,” said Liberum Capital Ltd. strategist Susana Cruz. The energy sector has a 14% weighting in the
, while Bloomberg Intelligence data shows that analysts expect the industry to generate 20 percent of the index’s revenue this year.
One of the FTSE’s blue chip oil stocks, Shell Plc, is hovering near five-year highs. That 2018 peak coincided with a oil price of 75 dollars per barrel. If the $100 oil forecast is correct, the FTSE 100 could be heading much higher.
The picture contrasts with Paris, which is under pressure from China’s economic slowdown. LVMH, L’Oreal SA, Hermes International and Kering SA together make up almost a fifth of the CAC 40 index and drove the rally earlier this year. All have fallen from their peak earlier this year, as analysts warn that demand for stylish handbags and jewelry is likely to slow in China, as well as at home in Europe.
Meanwhile, the pound has lost around 4 percent against the dollar this month, key for FTSE 100-listed companies that generate around 75 percent of their sales abroad. Strategists at Goldman Sachs Group Inc. expect the pound’s weakness to continue strengthening exporters.
London’s problems are by no means over, with a sluggish economy and companies fleeing to New York for stock listings. Outflows from the market have been relentless, totaling $23 billion so far this year – according to Barclays analysis of EPFR data.
Years of declines have made London-listed shares extremely cheap relative to their peers. Based on a forward price/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 discount in the UK, we are seeing that discount baked into prices,” says Dan Kemp, chief investment officer at Morningstar, which has $295 billion under management. “From that fair value perspective, the UK is certainly a more attractive market than some others.”
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