Markets

The year London lost its market crown to Europe

London is no longer the largest European stock exchange. (the file)

It’s been a dramatic year for UK markets.

The onset of recession, inflation at a 41-year high, the resignation of two prime ministers and the largest number of strikes since Margaret Thatcher in the 1980s helped trigger a sell-off in domestic stocks and government and corporate debt.

The fall in many assets comes as Britain faces a potentially more severe cost-of-living crisis than other developed economies. This is partly due to the increase in the cap on household energy prices, as well as short-term mortgage repayments being more sensitive to rising central bank rates. Brexit, meanwhile, continues to cause supply chain problems for companies.

In total, about 550 billion pounds ($672 billion) of market value was stripped from indexes that track locally exposed stocks and bonds.

“It’s been a really tough year,” Anna McDonald, a small-cap fund manager in Edinburgh, UK, said by phone. “The estimates paint a pretty bad picture.”

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

London De-Throned

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

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

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

Pound’s turbulent year

British 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 fretted about the increase in government borrowing that would be needed to finance the policy. The pound fell to a low of $1.0350 against the dollar and, despite a subsequent recovery as Rishi Sunak replaced Truss as prime minister, remains poised for its biggest annual decline since 2016.

“The UK’s image has been damaged by Brexit, political turmoil and the episode we saw in September,” said Chris Igoe, chief investment officer at AKSA Investment Managers Core.

Gilt Yields Spike

Benchmark 10-year yields in the UK have risen by two percentage points this year, the most since 1994. The Bank of England has raised interest rates at the fastest pace in more than three decades to end double-digit inflation.

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

Corporate debt drought

Many sterling bond sales have been put on hold due to various bouts of volatility this year, with no jobs in the fortnight following the mini-budget and the ensuing liability-led investment (LDI) crisis that required the BOE to intervene.

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

The FTSE 100 moment

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

A weak pound benefited exporters, while favorable commodity prices fueled growth for companies such as Glencore Plc and Shell Plc. Non-cyclical sectors such as commodities and healthcare further strengthened the FTSE, as investors sought refuge during the economic downturn.

The FTSE 100 is the biggest developed market’s best performer this year in local currency terms, while it is down 11% in US dollar terms, and is on track for its biggest outperformance against its eurozone peers since 2011.

Home Stock Doom

The outperformance of British stocks is limited to bluechips. The FTSE 250 midcap index and another benchmark that tracks domestically-focused stocks, the FTSE local UK index, are both down more than 20% year-to-date, the most since the 2008 global financial crisis. Concerns about the UK economy, rising interest rates and the fallout from Brexit have hit sectors such as housing, banking, property investment and retail.

Still, the dynamics of UK stocks could change next year, says Susana Cruz, strategist at Liberum Capital Ltd. She expects UK mid-caps to surpass large caps as inflation eases and the dollar weakens.

Reduction of shares at the IPO

London isn’t just losing ground on market value. While it was a poor year for IPOs globally, UK equity’s share of European initial public offering proceeds fell to its lowest level since 2009. According to data compiled by Bloomberg, London listings raised just 1.5 billion this year pounds, which is 9% of the total in Europe.

London has not had a single billion-dollar IPO this year, with only five deals raising over $100 million.

(Other than the headline, this story was not edited by NDTV staff and was published from a syndicated feed.)

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