The FTSE 100 is back where it was in summer 2016, and still languishes below the peaks of 2007 and 1999, while the pound trades near five-year lows against the dollar and close to a ten-year trough against the euro.
It is therefore deceptively easy for value-seeking contrarians to make a case for a UK stock market which has underperformed and feels unloved. This is particularly the case when merger and acquisition activity suggests that someone already thinks there is value to be had on these shores and the FTSE 100’s earnings mix means it is a good recovery play, in the event the COVID vaccines do the business and global economic activity starts to pick up in 2021.
“That said, there are more than enough variables to make second-guessing the markets even harder than usual. Enthusiasm for UK equities is still tempered to some degree by Brexit, simply owing to the uncertainty of how this will look come 1 January, although anything is probably better than the fog with which investors have to contend at the moment.
“A persistent COVID-19 virus and a double-dip recession are both major threats to any recovery scenario and some investors will fight shy of the FTSE 100 because of the weighty influence of both oil and banking stocks, either for ethical reasons (in the case of the oils) or excessive global debts (in the case of banks) or simply in the view that both industries are simply a busted flush, as technological developments condemn them to the dustbin of history.
“Banks are indeed hemmed in on several fronts, notably record levels of global borrowing, the margin-crushing powers of central banks’ Quantitative Easing (QE) and Zero Interest Rate Policies (ZIRP) and the rise and rise of fintech rivals which could ultimately disintermediate the lenders as dissatisfied customers go elsewhere for their financial services (usually starting with their mobile phones).
“They are cheap, trading at sizeable discounts to book, or net asset, value, and probably deserve to be. But even Japanese banks managed some huge rallies even during the thirty-year pasting they have received at the hands of Japan’s equity and property market collapse and then the Bank of Japan’s QE and ZIRP policies and if the markets sniff an economic recovery, any steepening of the yield curve in the UK or inflation, then the FTSE 100’s big five banks could have a (potentially rare) good year.”