With only five trading days left before Christmas, domestically-focused UK equity investors have little to celebrate. For 2017, the FTSE 100 has trailed the MSCI All Country World Index by the largest margin in 14 years. And with a rise of just 5%, it is also the weakest major European equity benchmark. The Euro Stoxx 50 is up 8.2%, while Germany's DAX is up 14%.
This might suggest the UK is due a period of catchup in 2018. But we believe the UK will continue trailing Eurozone benchmarks for three particular reasons:
- The UK market underperforms in periods of global economic strength. Just 26% of the UK market is in cyclical sectors – firms that flourish when growth is strong. That compares to 46% for the Eurozone. Since we expect another year of robust growth in 2018, the UK market is likely to be handicapped again by its more defensive composition.
- Sterling weakness is no longer providing a tailwind. UK firms got a boost from the post-Brexit depreciation of sterling since around three-quarters of FTSE 100 revenues come from overseas. The currency has now stabilized and could become a modest headwind for earnings in the first half of 2018.
- Earnings per share growth is set to lag. We forecast profits to rise by 5% in the UK, about half the rate of growth we expect for the Eurozone and the US.
So, we remain underweight UK stocks versus the Eurozone within Europe. The weakness of the UK is also a reminder for investors of the perils of a home bias and the benefits of diversification.
Do you like this?
Please click below to sign up for more investment views.