British stocks are lagging far behind all other major assets in the Covid recovery as Brexit jitters return to haunt London’s unloved market.
UK equities and gilts were the worst performers of 20 top assets in the last three months, according to Barclays, unable to keep up with stocks elsewhere in the world as well as bonds and commodities.
Only oil has performed worse in 2020 with the FTSE 100 and 250 still down a respective 21pc and 19pc this year. By comparison, the S&P 500 US benchmark is up 8pc after a remarkable recovery. The Euro Stoxx 50 is down by a more modest 11pc.
Emmanuel Cau, head of European equity strategy at Barclays, said London’s domestically focused stocks are being hit by investor concerns about Brexit as money is yanked out of the UK market ahead of a December deadline for trade talks. Of 40 market indices tracked by the bank globally, the FTSE 100 was the worst performer in the past quarter. Only stocks in Spain, Austria and Singapore have done worse in the last 12 months.
Traders could be pricing in Brexit uncertainty, Mr Cau said, adding that a rise in the pound versus the dollar over August has also weighed on the FTSE’s big international earners as the greenback slides on currency markets.
Many FTSE 100 firms earn their money in dollars, so a stronger pound means profits are worth less when converted to sterling. The stimulus from central banks and governments has helped global stock markets rebound from their March nadir after Covid-19 fears rattled investors.
The markets recovery has been led by soaring US stocks, with the S&P 500 up 56pc since its March low to a record high. The latest leg of the US rally was fuelled by the Federal Reserve hinting it will continue with ultra-low interest rates. The US central bank is switching to an average inflation target, meaning it will tolerate higher price rises before lifting rates. The S&P opened at a record high for a fifth straight day on Friday after Fed chairman Jay Powell’s speech the day before.
Mr Cau warned that fears are now mounting over a correction, where shares fall more than 10pc from an index’s 52-week high. The US election, a “jittery bond market” and the second Covid wave in Europe are all “potential headwinds” for global markets, he said.
Joachim Klement, analyst at broker Liberum, said the Fed’s switch to a 2pc average inflation target means interest rate hikes are unlikely. He argued that other central banks, including the Bank of England, will likely follow as reining in support would trigger a rise in the pound against the dollar. He added: “Given the dire economic situation in Europe and the UK, it seems far-fetched to believe the Bank or European Central Bank would consider tightening monetary policy in the next five years. Instead, they are flirting with similar changes as the Fed.”