A leader in the vaccination campaign, the United Kingdom was also one of the first countries to normalize economic activity. Therefore, the country is ahead in terms of exit from the crisis. With good results, since its growth rebounded strongly in the 2nd quarter. However, not everything is rosy. Brexit is felt, as is an economic and stock profile that does not favour the country at the moment.
London pressed to end restrictions
As we know, the industry sector performed better during the long period of restrictions caused by the pandemic. Since households cannot access a wide range of services, as usual, they have concentrated on purchases of goods, particularly durable goods. A worrisome trend for an economy such as the British, mainly dedicated to services and leisure. So it was no surprise that the UK was rushing to reduce pandemic restrictions as quickly as possible.
Another motivation for Boris Johnson's government was: the initial success of his British vaccination campaign - when the European Union was bungling its own - was presented as one of the benefits of leaving the country from the EU. Moreover, by opening its economy-wide, reaching higher growth figures than those of Europe, the British economy sought confirmation: it could leave the EU and flourish afterwards.
Good growth, to be confirmed afterwards
At first glance, the bet was successful. At 22.2% over one year, British growth in the second quarter exploded with the opening of services-related sectors, driven by household spending that soared in the HoReCa or transport sectors. But when you look at it more closely, there are still some problems.
First, while activity has rebounded, it remains distant from the pre-pandemic levels across almost all sectors. Overall, GDP declined by 4.4% compared to the peak in the fourth quarter of 2019. Second, investment remains depressed, still falling, even at a time when the economy is growing. Third, the companies note reduced visibility for the future. And in a world where supply chain difficulties are evident everywhere, the country's exit from the European Union makes them particularly evident in the United Kingdom. On the one hand, the UK has to face a series of new constraints in its trade with the European Union. But, on the other hand, compared to the period before the pandemic, the country lost nearly 800,000 workers, including a significant proportion of European workers who left it for different regions.
Therefore, the labour market is very tight, and some profiles are not found, which inevitably weighs on activity. Gradually, the euphoria associated with the reopening fell back: retail sales fell for the first time since January in July. The British economy has thus rebounded well. In the short term, it should benefit from the fact that once heavily indebted, households have taken advantage of the pandemic to replenish their savings reserves, which should be supported by consumption. However, as one of the countries where the virus circulates more freely, the risk associated with the pandemic remains high.
And since the EU exit agreement does not provide much for the services sector, the impact of Brexit on a vital part of the economy will become more evident with the increase in the activity.
A cheap but not fashionable stock market
Suppose Boris Johnson's United Kingdom wants to be the first in the class regarding vaccination and recovery. In that case, the London Stock Exchange benefits relatively little and remains less expensive than others. The composition of the British market is a major factor.
Fashionable sectors, such as information technology, are largely absent from the London market (barely 1.3% of MSCI United Kingdom). On the other hand, sectors neglected by investors are present. This is the case for the financial sector, whose results have been subject to meagre interest rates and competition from US banks in market-related activities or even complicated restructuring processes (sales of many assets and domestic decline). However, it still represents 17.6% of the index.
The energy sector accounts for almost 10% of the London stock market. However, if it continues to offer attractive benefits, the industry struggles to evolve its business model. As a result, when the energy transition and ESG standards are very much in investors' minds, a growing number of them – notably the funds – are deviating from them.
Therefore, the correlation between profits and prices is under pressure and, even cheap equities in the sector have difficulty finding a buyer like the London stock exchange as a whole.
Add to this the presence among consumer goods of British American Tobacco or Imperial Brands (also linked to tobacco), both +/- 4% of the MSCI United Kingdom that is not the taste of all investors.
The London stock exchange is somewhat out of date and pays cash. Despite a strong recovery and a valuation level generally lower than that of the US or European markets, its recent performance is disappointing. With a total return (prices and dividends, in €uros) up 17.5% since the beginning of the year, London is worse than New York (22.8%), Stockholm (26.6%) or Zurich (20.2%), and is also slightly down against euro area equities as a whole (18.5%). Despite pound's rise against the euro (+4% since the beginning of the year), all this should have benefited it.
Do we still have to invest in London?
Although this market has been disappointing for several years – and particularly since the referendum that dictated the exit of the country from the EU – London remains a cheap market, a fact that is relatively rare these days for it to be emphasized. And since its performance in recent years has been less correlated with that of other exchanges (Brexit, absence of IT) and is relatively volatile, it is interesting in terms of diversification.
Thanks to these factors, it integrates, in a small amount (5%), the Euroconsumers Invest's portfolio.