Journalism of Courage
UK equities have been laggards ever since the 2016 Brexit referendum, and they didn’t do any better with Boris Johnson running the country.
The FTSE 100 and the locally-focused FTSE 250 have both fallen about 8% in dollar terms since the outgoing Prime Minister took office in July 2019, with a bleak economic outlook and political turmoil since Brexit keeping investors away from UK assets.
That’s meant significant underperformance against the S&P 500, which is up 29%, and the MSCI All-Country, which has gained 14%, during Johnson’s tenure. Returns for the Euro Stoxx 50 have been similar to the FTSE 100, though the European gauge has substantially outperformed the UK since Brexit — a pillar of Johnson’s political legacy.
The pound, meanwhile, hit a two-year low against the dollar this week and only managed a timid bounce after Johnson’s resignation. UK stocks rose on Thursday, along with broader markets.
“Changes on the political landscape is normally something that investors don’t like, but it was just a matter of time before Johnson fell, so there is now the relief that the British government could finally close the BoJo chapter and move on,” said Ipek Ozkardeskaya, senior analyst at Swissquote.
The poster child of the underperformance may be the travel and leisure sector. The FTSE 350 Travel and Leisure Index has dropped 42% since Boris Johnson took office while its continental European equivalent is down 17%. Staff shortages and cost inflation have pummeled the sector in the UK, with Brexit making it harder to hire workers.
The local economy has also not been doing well. UK retailers fell about 3.5% in local currency terms in the roughly three-year period, while global retailers are up 14%. Banks have also suffered, with the UK banks benchmark plummeting 16% during Johnson’s time in office and global banks falling 6%.
The Prime Minister’s resignation is now fueling speculation about a potential change in fiscal policy that could boost Britain’s stock market.
With the relatively frugal Rishi Sunak no longer serving as Chancellor of the Exchequer, some are betting that Conservative leadership candidates may seek support by pledging to cut corporate taxes. That could give domestic shares a much-needed lift, with the levy on companies set to be raised to 25% from 19% next year.
In the meantime, the weak pound and a 75% exposure to overseas revenue, as well as a strong makeup of commodities, have allowed the FTSE 100 to finally outperform this year. The blue chip index has fallen less than 3% in 2022, while global peers are down nearly 20%.
Sill, some remain negative about what’s ahead for UK markets amid a cost-of-living crisis and monetary tightening by the Bank of England.
There is “zero prospect” of a shift to a softer Brexit, said Evercore ISI analysts Krishna Guha and Peter Williams. UK assets will be “dominated by the threat of entrenched stagflationary dynamics and the associated pressure on the Bank of England to speed up hiking into an unfolding economic slowdown rather than the political change of the guard.”
