The UK’s FTSE 100 index of stocks has completed its worst annual performance since 2008 while stocks in the US, China and elsewhere streak ahead, highlighting the uneven global recovery from the markets shock of the spring.
The UK benchmark stands 14 per cent weaker at the end of the year, edging beyond a drop in 2018 to make this the worst year since the financial crisis of 2008, when the index fell more than 30 per cent.
Meanwhile, the US benchmark, the S&P 500 index, has gained more than 16 per cent this year, shrugging off its steep drop in March, while the technology focused Nasdaq Composite has gained more than 40 per cent. China’s CSI 300 rounded off the year with a 27 per cent gain as the country’s economy emerged first from the pandemic shock, while Germany’s Dax eked out gains for the year in December.
Much of the UK’s underperformance is down to the FTSE’s heavy weighting towards oil and resources stocks — a sector that has suffered badly through coronavirus. Some analysts and investors remain wary, particularly with the long impact of Brexit lying ahead and with the prospect of a stronger pound eating away at the index’s dominant overseas revenues. Others are more optimistic.
“The UK is one of our favoured global equity markets, particularly from an unhedged perspective as we suspect a large proportion of the return for international investors will come from the strengthening currency,” said Nick Nelson, head of European equity strategy at UBS. The bank expects sterling to reach $1.44 by the end of 2021, from around $1.36 now.
Without the post-Brexit trade deal agreed on Christmas Eve and approved by the UK parliament on the penultimate day of the year, “UK equities would not be a favoured market”, he added.
UK equities may also now stand to gain from investors’ cooling appetite for US tech stocks. “During the market fall in March, we saw investors move into large-cap stocks in general as they are typically more defensive,” said Jon Guinness, portfolio manager at Fidelity International. With the emergence of vaccines, he said, a broader “cyclical recovery” is now possible.
Using MSCI stock gauges to smooth out some of the differences between various national benchmarks, the total return on US stocks reached 20.5 per cent in 2020 in local currency terms, while MSCI’s China Index rose 28 per cent. European shares, excluding the UK, rose 3 per cent, while UK shares fell 12 per cent by this measure.
Most investors believe 2021 will be brighter for global stocks, particularly with bond yields rooted at low levels. “In the near-term, markets may be susceptible to some periodic bouts of volatility as investors gauge the tug of war between worrisome virus trends and the lagged timeline towards widespread vaccination and a return to normality,” said Candice Bangsund, portfolio manager at Fiera Capital.
“Beyond the near-term, however, the outlook for both the global economy and stock markets remains extremely bright, particularly as the end of the pandemic is now in sight,” she added.
The pledge by the US Federal Reserve to keep interest rates low to help generate an economic recovery from the crisis has pushed the dollar almost 7 per cent lower against a basket of other major currencies this year, its biggest drop since 2017.
The pound gained about 3 per cent, carving out its highest point of the year on the final day of 2020. Other currencies gained more strongly: Sweden’s krona rose 14.5 per cent, its biggest gain against the dollar since 2006, while the euro rose 9.5 per cent and the yen increased 5.3 per cent, the most in nine years.
The oil sector suffered heavily during the initial spread of Covid-19. After reaching lows of $16 in April, Brent crude ends 2020 around $51 a barrel. Prices are down over a fifth from the end of 2019.