(Bloomberg) – With Boris Johnson’s premiership in turmoil, the country’s stock market has shrugged off the political drama and is now outpacing all major developed stocks.
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After years of underperformance, the FTSE 100 index is up 1.5% this month, while most major indicators in the US and Europe fell. Leaving aside the UK political dramas, the blue chip gauge mainly benefited from a large exposure to so-called value stocks.
With bond yields rising, investors discounted future earnings at a higher rate, pushing them into cheaper sectors such as banks, many of which are in the UK. The UK benchmark is also rich in oil stocks such as Royal Dutch Shell Plc and BP. Plc, which have been boosted by soaring crude prices.
These market forces “transcend the leadership debate and, for now, keep politics as an important thing, but not the most important thing,” said Wesley Mccoy, who oversees the UK Value Equity fund at the manager. of Abrn assets.
According to Alexandra Jackson, director of the Rathbone UK Opportunities Fund.
Another boon for the FTSE 100 is its broad composition of so-called defensive stocks such as healthcare, basic goods and telecoms at a time when monetary tightening is fueling uncertainty. Morgan Stanley sees “stars align” for British stocks, the strategists led by Graham Secker wrote in a note.
Simple valuation measures also favor Britain. The FTSE 100 index is trading at a 17% discount to the Euro Stoxx 50 index in terms of forward price-to-earnings ratio, although this is less than the 26% gap seen in September. And a forward dividend yield of 3.9% is about double that of its global peers.
Yet the FTSE 100’s strong start to the year doesn’t entirely reflect the strength of UK companies, with the benchmark owing most of its gains to London-listed international companies. Index members generate around 75% of their income overseas, according to calculations by Goldman Sachs Group Inc.
The more domestically focused FTSE 250 index fell 4.6% in January, compared to a 2.5% decline for Europe’s Stoxx 600.
And for some market participants, there are concerns that the factors that have benefited the FTSE 100 this month are now being factored in.
“We don’t think the recent outperformance in UK equities has much more to do,” HSBC strategist Max Kettner wrote in a note, “In fact, it has already exceeded our model’s estimates.”
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