Based on a forward P/E ratio, the FTSE 100 currently trades at a 35% discount to the MSCI World Index.
Less than a year after losing the title of Europe’s largest stock market, London looks set to win it back from Paris, as the rally in French luxury shares falters.
The combined market capitalization of Britain’s major dollar exchanges now stands at $2.90 trillion versus France’s $2.93 trillion, according to an index compiled by Bloomberg. The gap between the two has gradually narrowed, mainly due to the decline in France’s value from a record $3.5 trillion last year. London, meanwhile, is seeing signs of investor confidence for the first time in years, with strategists at HSBC Holdings Plc, Barclays Plc, and JPMorgan Chase & Co. predicting an optimization for a long-clouded market from the uncertainty linked to Brexit. That’s a significant change from last year when a Bank of America Corp investor survey ranked the UK as the most despised market globally.
Barclays analyst Emmanuel Cau believes the UK market is currently a good haven and expects that exposure to energy and easing inflation could unleash significant investment flows.
So, what’s working in the UK? First, its shares are enjoying a 30% rally versus oil over the past three months. Second, inflation is finally cooling, potentially allowing the Bank of England to end its 22-month tightening cycle. This could weaken the pound against the dollar, crucial for an index dominated by exporter shares.
BofA data showed flows from UK equity funds continue to decline, reversing a brief spell of gains in mid-September. There is certainly scope for investors to add to UK positions, as global funds are still 22% underweight the market, according to a BofA survey.
“The advantage of the UK market is that it is heavily weighted towards energy stocks, which have performed relatively well,” said Susana Cruz, an analyst at Liberum Capital Ltd. The energy sector has a 14% weighting in the FTSE 100, while Bloomberg Intelligence data shows that analysts expect the industry to generate 20% of the index’s earnings this year.
One of the FTSE’s blue chip oil stocks, Shell Plc, is approaching the five-year high of 2018. That 2018 high coincided with an oil price of $75 a barrel. Now, if predictions of a $100 oil price are correct, the FTSE 100 could rise much higher.
The situation contrasts with that of Paris, which is under pressure due to the Chinese economic slowdown. LVMH, L’Oréal SA, Hermes International, and Kering SA together account for nearly a fifth of the CAC 40 index and led the rally earlier this year. All have fallen from highs hit earlier this year, as analysts warn that demand for luxury handbags and jewelry could slow in China, as well as in Europe.
Meanwhile, sterling has lost around 4% against the dollar this month, a key driver for FTSE 100-listed companies that generate around 75% of their sales overseas. Strategists at Goldman Sachs Group Inc. expect sterling weakness to continue to support exporters.
London’s problems are certainly not solved, with an economy in crisis and companies fleeing to New York to go public. Market exits have been relentless, amounting to $23 billion this year, according to Barclays’ analysis of EPFR data.
Years of decline have made London-listed shares extremely cheap compared to their rivals. Based on a forward P/E ratio, the FTSE 100 currently trades at a 35% discount to the MSCI World Index.
“For a long time there has been a real depreciation for the UK, we see that discount almost baked into prices,” said Dan Kemp, investment director at Morningstar. “From a fair value perspective, the UK is certainly a more attractive market than others.”
Original article published on Money.it Italy 2023-10-17 07:00:00. Original title: La ripresa del mercato azionario britannico
