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Roula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.
In these turbulent times in global markets, UK stocks are falling back on their secret weapon: being boring. This is a plus when investors are in the throes of a big rethink over high-growth high-tech stocks that have led global markets higher for the past couple of years.
Sanity is setting in as investors face up to the reality that the fastest rising US-listed stocks simply cannot maintain their blistering pace of ascent. Chief among them, chipmaker Nvidia, had already climbed nearly 200 per cent in the year to late June. Finally, the market is saying that’s probably enough, especially after investors judged that the company’s impressively shiny outlook released at the end of August was not quite impressively shiny enough.
Added to that, evidence keeps on building that the US economy is, finally, landing. Data on Friday showed that the jobs market expanded in August at a somewhat slower pace than expected, and July’s reading was revised lower. In a speech shortly after the data was released, New York Fed chief John Williams observed that the economy has moved in to what he called “equipoise” (me, neither) and that as such, “it is now appropriate” to start trimming interest rates. Whether that is by a half or a quarter of a percentage point this month remains a point of debate among market participants.
For the UK, the point is this: the fizz has come out of big tech and out of the US economy. As a result, so far this month, the US bellwether S&P 500 index of blue-chip stocks has dropped by 2.6 per cent. The more tech-heavy Nasdaq 100 has declined 3.3 per cent. Nvidia itself has fallen 10 per cent. The UK’s FTSE 100, meanwhile, has shed a relatively modest 1.5 per cent.
Suddenly, the benefits of lacking the razzle dazzle of tech stocks are kicking in. Smaller, steadier, cheaper ones in the US, but also including the UK’s bedrock of banks and miners, are in much greater demand. Boring is beautiful or, as one reader put it to me in an email this week, it is a case of Beige Against the Machines.
The FTSE 100 index of biggest UK stocks is up by more than 6 per cent this year, or more than 10 per cent in US dollar terms, while the FTSE 250 — generally a closer reflection of the UK economy itself — is up by 4.5 per cent.
“Buy British,” Goldman Sachs enthused in a note to its clients this week. The FTSE 100 offers diversification away from tech-loaded US markets, analyst Sharon Bell wrote.
“We think there is a strong case for diversification into UK equities, which look inexpensive, offer high shareholder returns and — for the mid-caps — should benefit from a continued modest economic revival,” Bell said.
One big reason for the relative cheapness of UK markets, Bell noted, is that domestic investors have tended to shun their own market. UK pension funds allocate around 4 per cent of their assets to UK stocks, think-tank New Financial said in a report this week, down from over half 25 years ago — a stunning retreat.
And while UK investors are looking abroad for juicy returns, international investors can quite rationally overlook the UK altogether, since it now makes up around 2 per cent of the MSCI global stocks index, down from more than 5 per cent in 2010.
If the power brokers of the City in London have anything to do with it, that is set to change. At an event hosted by the London Stock Exchange on Friday, heavyhitters from the exchange itself, from government and from the pensions and asset management industry gathered to lay out the case for a revitalisation of UK markets. That includes private markets and infrastructure, where officials and executives see a much greater role for pension funds and other investors. They also want to fire up the UK-listed stock market, encouraging exciting new tech firms to list and stay there.
It is time to stop “admiring the problem” of stodgy UK markets, members of the Capital Markets Industry Taskforce said. A whole slew of fiddly but crucial tweaks to listing and disclosure rules has already started. But in addition, “positive narrative matters”, a new report by CMIT noted. “Narrative becomes perception and perception becomes reality.”
A government consultation is now under way into whether and how to reform the country’s clunky and fragmented patchwork of pensions schemes to channel more investment to both public and private markets. Some form of compulsion for UK pensions to do as Goldman Sachs suggested and “buy British” is even possible, but risky — funds love incentives but hate to be told what to do.
“I know mandation is really unpopular,” said Peter Harrison, a CMIT member and chief executive of UK investment manager Schroders at the LSE event. But it is unwise to think we can “get there by stealth” or rely on patriotism, he said.
CMIT’s efforts have a long way to go, in conjunction with government and with companies and asset managers across the UK. If they succeed, UK stocks will lose their powerful shield of boringness that protects them in times of market stress as we are seeing today For now, though, beige is better.