2 - The strongest FTSE since Beckham
The UK equity market outperforms the US market for the first time in years; 2021 becomes an excellent time to have increased UK positions amidst a structural shift towards value and away from growth.
Consensus view: While the FTSE 100 has had a spectacular November following the vaccine announcement, 2020 will still be considered an annus horribilis for the UK’s flagship equity market. It ended the year down 13%*, amongst the worst performing anywhere in the world. Indeed, it has been a perennial underperformer, especially when compared with the US: in the ten years between 2010 and 2019 it only outperformed the US equity market once (in 2016). The reason for this is simple – with large banks and energy supermajors, the sectoral composition of the UK market has been deeply out of vogue with regions where technology companies form a greater concentration. The US is a prime counterexample. Indeed, even as “value” investing is getting a boost in the post-vaccine jet-stream, the view lingers that UK banks and energy companies are mature at best, and in secular decline at worst.
What the market is not pricing in: Investors tend to be guilty of recency bias, where events that have occurred recently are weighed more heavily than those of the past. However, there was a time when the UK equity market not only held its own versus the US, but routinely outperformed. In the ten years between 2000 and 2010, for example, the FTSE 100 outperformed the US equity market six times. Ironically, those were years when technology was deeply out of vogue following the monumental dot-com crash at the turn of the century, and banks and energy companies were all the rage (prior to 2008, at least). In that decade, technology stocks – similar to the UK market today – were cheap, oversold and began trending upwards. In hindsight, it presented a fantastic opportunity.
Potential market reaction: Given the consensus, most investors are underweight UK equities. However, a synergistic combination of a Brexit-deal and Covid-vaccine could see a stronger domestic economy againts a backdrop of robust global growth, which will play to the strengths of banks and energy companies, along with the general value-tilt of the index. This could lead to the FTSE 100 outperforming the S&P 500 for the first time in years. Indeed, this becomes a great time to have increased UK positions amidst a structural shift towards value and away from growth.
Our positioning: We recognise these structural trends and have recently increased our equity weight to emerging markets and to Japan, both regions which should benefit from a renewed push towards value-oriented investing. However, we continue to also consider the UK closely. We are currently underweight in most strategies, but are closely following valuation, momentum and sentiments signals as well as the economic regime as it unfolds.
Chart 2: FTSE 100 vs. S&P 500 (Total Returns)
2000 - 2020
Source: Kleinwort Hambros, FactSet. Data as at 11th December 2020.
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