U.K. Stocks Haven't Had It This Bad Since Financial Crisis

  • Rout in commodities sent FTSE 100 to three-year low this week
  • FTSE 100 set for first back-to-back annual losses since 2002

Just a few months ago, it looked as though Britain’s stocks were set for a stellar year. It’s turning out to be their worst since the 2008 financial crisis.

Despite a healthier economy, record-low interest rates and a surprise win by David Cameron in the May elections, the FTSE 100 Index was marred by its heavy exposure in commodity producers. Anglo American Plc and Glencore Plc sank more than 70 percent in 2015, dragging the benchmark gauge down 8.4 percent. It’s now on course for a second consecutive annual loss -- the first back-to-back declines since the burst of the dot-com bubble in 2002.

“When you’ve got companies like Anglo American, Glencore, BHP Billiton in your benchmark index, you’ve got a problem,” said Michael Hewson, the London-based chief market analyst at CMC Markets Plc. “It posted a new record high this year, but ultimately it is going to finish below where it opened and that for me is a significant concern for its performance going forward.”

Commodities rout hits U.K. stocks.
Commodities rout hits U.K. stocks.

Even after yesterday’s rebound, the FTSE 100 closed 15 percent below its April record. It added 0.7 percent today.

U.K. stocks have lost almost $700 billion in value in little more than half a year, and investors have increasingly shunned them. Their allocation to the shares was 21 percent underweight in December, from 15 percent last month, according to the results of a Bank of America Corp. survey published yesterday. The U.S. bank is among firms saying the commodities rout isn’t over.

Mark Boucher, a fund manager at Smith & Williamson Investment Management in London, says the trick is to stick with stocks focused on the domestic economy, forecast to grow 2.4 percent this year and 2.3 percent next -- more than the euro area. The FTSE 250 Index of the nation’s mid-cap companies is heading for a 5.7 percent gain this year, its fourth consecutive annual increase.

“There are companies that have exposure to growing parts of the U.K. economy,” said Boucher, who helps oversee 15 billion pounds ($23 billion). “Construction in the U.K. is quite an attractive area. Anything that’s exposed to U.K. consumer spending has performed quite well.”

Housebuilders Berkeley Group Holdings Plc and Taylor Wimpey Plc have surged more than 44 percent this year -- the most in the FTSE 100 -- as the government introduced incentives to boost construction. ITV Plc and Imperial Tobacco Group Plc have rallied more than 22 percent.

Homebuilders are doing well this year.
Homebuilders are doing well this year.

Forecasts for where the FTSE 100 will end 2016 are mixed. Citigroup Inc. strategists expect the index will reach 7,100 -- 18 percent above yesterday’s close -- though they’re warning central-bank stimulus may lead to equity-market bubbles in the next couple of years. Morgan Stanley has a tamer outlook, estimating the U.K. gauge will rise only 5.4 percent.

And with a potential Federal Reserve rate increase today, many are saying the Bank of England will be next, adding to the uncertainty for the U.K. market and painting a cloudy horizon for the shares at the end of a turbulent year.

“We are in the midst of the biggest financial experiment we’ve ever seen in terms of QE and the scale of it and nobody quite knows if policy makers are ahead of the curve, behind the curve or on the curve,” said Clive Beagles, a senior fund manager at JO Hambro Capital Management in London. His firm manages 18 billion pounds. “It’s felt like a two-step forward, two-step back year, and that’s how it’s going to end.”

(A previous version of this story corrected the country of the gauge mentioned in the ninth paragraph.)

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