The year London lost the crown of its markets to Europe

The year London lost the crown of its markets to Europe

London is no longer the largest stock exchange in Europe. (File, Archive)

It has been a dramatic year for the UK markets.

The onset of a recession, inflation at its highest in 41 years, the resignation of two prime ministers and the largest number of strikes since Margaret Thatcher in the 1980s have helped trigger sell-offs in national stocks and government debt. and corporate.

The fall in many assets came as Britain faces a potentially tougher cost-of-living crisis than other developed economies. That’s partly due to increases in the domestic energy price cap, as well as short-term mortgage payments being more sensitive to rising central bank rates. Meanwhile, Brexit continues to cause supply chain problems for companies.

In all, around £550bn ($672bn) of market value has been removed from indices that track locally exposed stocks and bonds.

“It’s been a really tough year,” Anna Macdonald, an Edinburgh-based UK small-cap fund manager at Amati Global Investors, said by phone. “Valuations paint a pretty poor picture.”

Here’s a breakdown of what happened in the UK markets this year:

dethroned london

This was the year that the UK lost its crown as the largest stock market in Europe. The combined market capitalization of primary listings in Paris, excluding ETFs and ADRs, was $2.97 trillion as of Dec. 15 versus $2.95 trillion in London, according to data compiled by Bloomberg.

And it wasn’t just France that toppled London: India and Saudi Arabia also overtook the UK. Saudi Arabian stocks benefited this year when Brent crude peaked at nearly $140. Saudi Arabian Oil Co., also known as Saudi Aramco, comprises more than half of the bourse’s market capitalization and is the world’s third-largest company.

Indian companies have benefited from access to cheaper Russian crude, according to Nick Payne, investment manager for emerging markets equities at Jupiter Asset Management.

The turbulent year of the pound

UK markets experienced bouts of high volatility in late September when then-Prime Minister Liz Truss and Chancellor of the Exchequer Kwasi Kwarteng announced a series of unfunded tax cuts in their so-called mini budget.

The announcement rattled markets as investors worried about the increase in government borrowing that would be required to finance the policies. The pound fell to a record low against the dollar at $1.0350, and despite subsequently rallying when Rishi Sunak replaced Truss as prime minister, it is still poised for its biggest annual drop since 2016.

“The UK’s image has been tarnished by Brexit, by the political turmoil and the episode we saw in September,” said Chris Iggo, chief investment officer at AXA Investment Managers’ main unit.

Dorado yield peak

Benchmark 10-year yields in the UK have risen by more than two percentage points this year, the most since 1994. That’s when the Bank of England raised interest rates at the fastest pace in more than three decades to put a limit to double-digit inflation.

And while yields have declined since the mini-budget, “perceptions of fiscal credibility have not fully recovered,” BlackRock Inc. strategists said in their 2023 outlook.

corporate debt drought

Many sterling bond sales were put on hold during the various bouts of volatility this year, with no deals in the two weeks after the mini-budget and the subsequent liability-driven investment (LDI) crisis that required BOE intervention.

At around £115bn including gilts, issuance fell to the lowest level since 2018, a time when investors were spooked by the UK’s struggles to secure a Brexit deal.

FTSE 100 Momentum

Meanwhile, the more international FTSE 100 stood out as a bright spot, after underperforming since the UK voted in 2016 to leave the European Union, partly due to a lack of “growth stocks” in areas like technology.

The pound’s weakness benefited exporters, while booming commodity prices boosted earnings at companies including Glencore Plc and Shell Plc. Non-cyclical sectors such as basic goods and healthcare further boosted the FTSE as investors sought refuge during the economic downturn.

The FTSE 100 is the best performing major developed market this year in local currency terms, although it is down 11% in US dollars, and is on track for its biggest outperformance against euro area peers since 2011.

Domestic Stock Doom

The outperformance of UK stocks has been limited to blue chip stocks. The FTSE 250 mid-cap index and another benchmark that tracks country-focused stocks, the FTSE Local UK Index, are down more than 20% so far this year, the biggest drop since the 2008 global financial crisis. Concerns about the British economy, rising interest rates and the aftermath of Brexit have hit sectors including homebuilding, banking, property investment and retail.

Still, the dynamics of UK stocks could change next year, according to Susana Cruz, a strategist at Liberum Capital Ltd. She expects UK midcaps to outperform large caps as inflation subsides and the dollar weakens.

Reduced share of initial public offering

It’s not just in market value that London is losing ground. While it was a bad year for IPOs globally, UK equity’s share of proceeds from European IPOs has fallen to the lowest level since 2009. According to data compiled by Bloomberg, listings in London have raised just £1.5bn this year, representing 9% of the European total.

London hasn’t had a $1 billion-plus IPO this year, and only five deals raised more than $100 million.

(Except for the headline, this story has not been edited by NDTV staff and is published from a syndicated feed.)

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