By Keith Skinner
The largest companies in the UK equity benchmark may stand to benefit from global economic shifts, including higher inflation, interest rates and capital spending.
In early November, fireworks and bonfires lit up the UK on Guy Fawkes Night—or “Bonfire Night”—to commemorate the Gunpowder Plot from 1605, when a group of assassins bungled the murder of King James I by failing to blow up the House of Lords. While recent events in the UK may not match the same life-or-death drama, the mini-budget released by the new Conservative leadership team did succeed in blowing up the UK government bond market, the British pound, and ultimately Liz Truss’s short spell as Prime Minister.
And yet, through all the turmoil, the UK equity market has shown considerable resilience. Despite swirling uncertainty around fiscal sustainability, stubborn inflation, the energy crisis and continuing labor market pressures, the FTSE 100 has been one of this year’s best-performing markets in local currency terms: As of October 28th, the FTSE 100 was down 4% year -to date, while the S&P 500 has dropped 20%. So what gives?
The short answer, in our view, is that the UK equity market tends to take its cues from shifts in the global economy rather than from troubles at home.
First, while the FTSE 100 is frequently thought of as the UK’s premier equity index, that’s something of a misnomer. In fact, many FTSE 100 companies are multinationals that do little to no domestic business, and as much as 80% of their total sales are made outside of the UK. Listing on the FTSE may well be more a matter of convenience: If you’re a company operating in one of the eight time zones between the UK and Singapore, a London listing could be helpful when raising capital.
Consider, too, that despite its recent performance, the UK equity market has lagged other global equity markets since the Global Financial Crisis. A cursory top-down view might blame the Brexit vote and its potential impacts on the UK economy; the reality, however, is that many of the largest companies in the benchmark—which hail from sectors such as energy, materials and financials—were not the chief beneficiaries of the goldilocks era of low inflation and ultra-low rates.
Moving forward, we believe geopolitical changes will drive broader economic shifts, including higher inflation, interest rates and capital spending. Those trends would seem to herald a brighter future for global companies in the real economy—and that’s potentially good news for UK equity investors.
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