From China to Greece, a confluence of issues is plaguing equities in the U.K.
While the nation is among the fastest-growing economies in western Europe, that’s not shielding its shares from the debt wrangling in Greece and a stock rout in China. The FTSE 100 Index is on track to underperform European equities for the fourth straight year, and options traders are protecting against more losses.
With confidence crumbling in China, the FTSE 100’s 21 percent weighting in commodity producers will further weigh on the gauge, according to Jasper Lawler of CMC Markets. Bank of America Corp. on Wednesday cut its ratings on European industries most tied to China, recommending to sell miners.
“China is the No. 1 focus for U.K. markets, and Greece is front and center,” Lawler, a London-based analyst at CMC, said by phone. “There’s ongoing concern that the rout in the Chinese stock market is going to spread into the broader economy and sap out demand for commodities, which was already perceived to be struggling.”
A gauge tracking miners fell to a six-year low this week, while the Bloomberg Commodity Index is near its lowest level since 2002. Since the Shanghai Composite Index peaked on June 12, half of the 10 biggest losers in the FTSE 100 have been mining stocks. Rio Tinto Group and Anglo American Plc have plunged more than 12 percent.
Bank of America cut European miners to underweight and energy producers to market weight, the equivalent of a hold.
“A combination of a possible Grexit and the collapse in the Chinese equity markets is likely to push out the recovery in these sectors,” James Barty and Tommy Ricketts, European equity strategists at the brokerage in London, wrote in a note on Wednesday.
The cost of bearish FTSE 100 options has risen 23 percent since a low in May and reached its highest level since February relative to bullish contracts. They’re more expensive than those on France’s CAC 40 Index, Germany’s DAX Index or the Swiss Market Index. All 10 most-owned FTSE 100 options are puts.
Investors are hedging even as Britain’s economy is forecast to expand 2.5 percent this year, faster than the rate of growth in the U.S. or Germany. Chancellor of the Exchequer George Osborne expressed confidence in the nation’s economy as he unveiled the new budget on Wednesday.
There are many U.K. stocks that are cheap and have competitive advantages on a global scale, such as Imperial Tobacco Group Plc, according to James Bevan of CCLA Investment Management Ltd. The FTSE 100 trades at 15.6 times estimated profits of its members, near a five-month low.
“You have to be selective, and the direct China plays like commodity companies or oil majors will be hard, but there’s still plenty of value in the U.K.” said Bevan, the London-based chief investment officer at CCLA. The turmoil in Greece may further delay when the Bank of England raises interest rates, which could benefit stocks, he added.
Still, the FTSE 100 has lost 8.6 percent from its record in April. It has fallen 1.2 percent this year, compared with a 5.8 percent increase in the Euro Stoxx 50 Index.
“We’re underweight commodity-related stocks and neutral the U.K. as a whole,” said Scott Baikie, a fund manager at Thomas Miller Investment Ltd. in Edinburgh, which oversees about $4.5 billion. “This correction in the U.K. market might have further to go.”