'Unloved' is an adjective often applied to British shares in recent years. A more appropriate description might be 'abandoned, with half a dozen kids and the rent unpaid'. Since referendum day in June 2016 the FTSE100 index has grown by 10 per cent. Over the same period the Hang Seng is up 42 per cent, the DAX up 44 per cent, the Dow Jones up 88 per cent and the Nasdaq up 184 per cent. The FTSE100’s longstanding underperformance goes back far further, though, than that. It is still lower than it was on the last day of the last century – although there has been substantial growth in the midcap stocks which make up the FTSE250.
Yet some seem to think that the ship has finally come in for UK shares. In recent months, money has begin to flow back into UK markets. And now several investment trusts have borrowed heavily to invest in more UK shares, convinced that the trend will continue – that the UK is the place to look for value shares. The Fidelity Special Values Trust has increased its gearing to 19 per cent and the Invesco Perpetual Select UK Equity Trust has upped its own gearing to 17 per cent. They are bound by their own rules to invest in UK stocks, but they wouldn’t be gearing themselves so heavily if they didn’t feel convinced that they are into a winner. The former, by the way, has Legal & General, Aviva, Imperial Brands, John Laing and Serco as its biggest holdings; the latter favours Barclays, Tesco, BP, Barrick Gold, BAT, SSE and Next.
Are they right, and we are on the verge of a bonanza in home-grown stocks? There are several arguments on the bullish side. UK stocks were depressed by uncertainty over Brexit; that has now been resolved – or sort of. The UK’s vaccination programme is running ahead of that of any other large country, which should allow us to open our economy faster. UK stocks have been hammered well beyond that they deserved, so there is bound to be a correction in their favour. The FTSE 100 index is dominated by energy and financial stocks which have been especially badly hit by the pandemic but are now recovering.
But, as always, there are counter arguments. We may have two Brexit deals: a withdrawal deal and a trade deal. But they have thrown up serious problems. January’s plunge in exports to the EU might turn out to be a blip – after all, the previous month importers were stocking up on goods in order to beat what they feared was a cliff edge.
The government insists that levels of lorry traffic are back to normal. Nevertheless, there are rather too many reports of exporters being confounded by the new rules – such as the man who exported £30 packs of cheese to the EU but has now stopped after being asked to pay £180 in customs duties each time. Perversely, he now finds it easier to export to the US instead – in spite of Britain not having a trade deal with that country.
At the same time, the EU has threatened legal action over the government’s slowness to enact the rules agreed over the internal border between Britain and Northern Ireland. A long war of attrition possibly beckons.
The UK vaccination programme in running well ahead of that of the EU, but that doesn’t necessarily mean that the economy will reopen quicker. The government as yet shows little sign of taking advantage of the vaccine programme to lift lockdown restrictions. On the contrary, we remain with tighter rules than just about any other country in Europe or the world. Moreover, the UK economy shrank last year by more than most; we face a longer haul out of the mire.
Just because UK stocks have been hit hard does not necessarily mean they will perform better than others over the next year or two – while there is nothing to say that energy and financial stocks need to recover. The world, after all, is supposed to be weaning itself off oil.
The FTSE100 is dominated by big, slow-growing companies with large defined-benefit pension schemes to nurse. Many will emerge from the Covid crisis with large debts. They ought to expect to recover their business as economic activity returns, but it is hard to image that they will be the most dynamic of performers in months to come. If the FTSE100’s ship has come in, it may turn out to be one of those oil tankers which take several miles just to change course.