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The year 2022 lit up the face ofLondon Stock Exchange. The Russia-Ukraine war, a surge in the commodity market, rampant inflation, expected interest rate hikes at home and abroad and especially the search for “defensive” channels (less sensitive to a slowdown in activity) – all of which led investors to embrace the British blue chip index, the FTSE 100.
The FTSE 100 index can be suitable for an investor who is looking for exposure to companies of the old variety – large and stable, with a cash accumulation and a generous dividend payment culture, or in short, what is known in professional parlance – “value companies”.
The FTSE 100 is considered a bastion of industry conservatism – commodity makers, mining companies, banks and insurance companies – all get a place of honor there, while internet stars and their sisters from other “growth” industries are invited to seek their fortune in Wall Street counties.
Energy giants such as BP and Royal Dutch Shell, commodity maker Glencore and mining company Rio Tinto are among the biggest contributors to the performance of the FTSE 100 in 2022, mainly against the backdrop of the jump in commodity prices ignited by the war in Ukraine.
Energy and raw materials companies make up almost a quarter of the index, close to double their weight in the pan-European Stoxx Europe 600 index. The British benchmark index also gives relatively large weight to manufacturers of basic consumer goods, such as the Reckitt Benckiser Group and Unilever, whose stocks generally tend to show resilience when there is concern that the recession is imminent.
Shares of HSBC and Barclay have benefited from the monetary restraint adopted by governors around the world to fight inflation (rising interest rates are generally positive for bank profitability).
The FTSE 250 did not participate in the celebration
It is important to emphasize that the FTSE 250, the mid-cap stock index, did not participate in the celebration, and continued to suffer from investor abandonment. This index gives higher weight to companies whose main activity is in the domestic market, while the FTSE 100 index contains an abundance of international companies and is more sensitive to the global economy.
Investors and officials expect a lukewarm year for the economy. The UK Chamber of Commerce has lowered expectations of UK GDP growth in 2022 to 3.6%, compared to 4.2% in its previous December 2021 forecast, and less than half of the 7.5% growth recorded last year. Weaker than expected in business investments. In the FTSE 250 index, relatively large weight is given to real estate companies, cyclical consumption and industry.
Until recently, the UK suffered from a chronic lack of attractiveness in the eyes of investors. For them, she was the “sick man” not only of Europe, but of the whole world. Since the vote to leave the EU in 2016, the FTSE 100’s performance has lagged behind its peers in the US and the eurozone, and it has been trading at a serious discount, which over time could not have been asked whether it was a “value trap” and not just “value” as usual. to think.
Will the value become a value trap?
“Value trap” is a term that refers to a stock or other investment that is priced at a low price relative to alternatives over an extended period of time, which may signal an inability to rise. Thus the UK became a hunting ground for foreign buyers looking for cheap deals, such as the US buyers of the Morrisons supermarket chain and the defense industry maker Meggitt.
As of mid-March this year, the FTSE 100 is trading at a future multiple of about 11, compared to about 14 in the STOXX Europe 600 index, about 20 in the S&P 500 index and about 15 in the Nikkei 225 index.
At the end of 2021, the future multiplier gap between the UK and other developed markets was about 40% – the highest after three decades. The trend has since been reversed, and this gap has narrowed. In May 2016, investors mainly feared that trade with the EU, the UK’s biggest partner, would collapse, and this concern was reflected in stock prices and the British pound. Although there is no denying that Brexit had a big impact, it does not tell the whole story In the UK it has not been to the satisfaction of investors for a very long time.
The gaps are especially noticeable when comparing to the US. Internet giants such as Google, Microsoft and Apple have all achieved valuations of about a trillion dollars, reaching record multiples. On the other hand, the Aveva software group, valued at £ 7.5 billion, is currently the largest technology group in the index. FTSE 100.
Danger of becoming a dinosaur market
While the US market is packed with growth stocks – companies that are often unprofitable but highly priced due to rapid revenue growth – the UK market is populated with businesses that do generate cash and profit, but often have slower growth rates. Paul Marshall, chairman of the hedge fund Marshall Weiss, recently spoke out strongly; for him, the UK is in danger of becoming “Jurassic Park” – a market suitable only for dinosaurs.
In the last decade, the dormant inflation environment and zero interest rates have pushed global investors into the worlds of technology and innovation. The technology industry and its interfaces with traditional industries (such as communications services, robotics, e-commerce, digital medicine, renewable energy, etc.) fascinated capital market players, and they expressed their preference through the indices. Britain was barely in the race. The technology industry accounts for less than 2% of the total market value of major UK stocks. In Germany this share is close to 11% and in the US it stands at almost 30%.
As interest rates began to rise, investor preferences changed, and the rest is history – henceforth, it seems that “value” is the “new growth” of the investment world, and Britain is no longer seen as an old-fashioned remnant of the 19th century. Schroders summed up the upheaval as follows: “In the last ten years, investors have admired the ‘virtual’ world. Now it’s the turn of the ‘physical’ world – energy, metals, objects.”
Unicorns are encouraged to sign up in London
Is it still too early to celebrate? Value stocks have already known quite a few periods of overperformance, such as the end of 2016 and 2018, and most recently in early 2021. All of this was undermined when “growth” returned to being the dominant narrative. Maybe this time it will be different, because the inflation environment is as hot as it was decades ago.
Either way, markets estimate that the shelf life of “value” fashions and defensive channels is not eternal, and one day investors will return to looking for “growth”. Thus, in order to remain attractive over time, the UK benchmark index will have to reflect the spirit of the technological age.
Britain seems to be moving in the right direction, especially after the corona plague, which accelerated the digitization processes. Thus, the UK government is currently making great efforts to encourage Unicorn technology companies to list on the London Stock Exchange, in an attempt to make the London market more attractive to technology founders, and this market can in turn help protect UK technology companies from foreign acquisition or control.
In 2021, London was ranked fourth in number of start-ups and unicorns, after Bay Area, Beijing and New York, and at the heart of the matter are the green-tech, fintech and health-tech industries. UK Digitization Minister Chris Phillip has called on the institutional investor public to back local technology companies. Although the industry is booming, investment managers, insurance companies and pension funds in the UK are giving priority to bonds and dividend stocks, partly in light of the growing demographic structure of these companies’ clients. Will be answered in the affirmative.
In conclusion, the FTSE 100 can provide an opportunity to be exposed to the giants of the “physical economy”, which may offer the investor relative stability, dividends and the backbone of the “value” trend. In the longer term, under-representation of “growth” companies, if left unchecked, could limit potential.