Slump in UK local stocks reflects headaches over new leader

(Bloomberg) —

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(Bloomberg) —

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UK domestic equities have had a difficult year. And with the recession looming and the pound plummeting, it’s hard to see how things will improve anytime soon for a new prime minister on that front.

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Britain’s mid-cap index – made up of companies heavily dependent on the local economy – is down 20% this year, on course for its biggest annual underperformance against the export-heavy FTSE 100. The steep losses show that investor pessimism has taken hold of the economy, with the Bank of England saying a recession could stretch into 2024.

“The FTSE 250 clearly has its challenges,” Russ Mould, chief investment officer at retail investment firm AJ Bell, said by email. “The UK economy is facing the difficult combination of high inflation, slowing growth, rising interest rates, low consumer confidence and substantial debt levels. nationally and at the consumer level,” he added.

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UK consumer price inflation topped double digits for the first time in 40 years in July, with Goldman Sachs Group Inc. subsequently warning that it could top 22% next year if prices natural gas remain high.

Against this backdrop, the national index has just suffered its worst losing streak since the pandemic-induced rout in March 2020, as investors turn more negative on UK equities. A net 15% of global fund managers are underweight the country’s stocks, up significantly from 4% in July, according to a Bank of America Corp survey. in August.

The weakness of the British currency is supported by the ruined currency of the United Kingdom, the pound trading near the lowest since 1985. Although it is a boon for the FTSE 100, a very important exporter – a surprising favorite of the investors this year because of its exposure to energy and banks – that means local businesses face rising costs just as customers face a cost-of-living crisis.

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It all adds up to a bleak economic picture for Britain’s new prime minister. Liz Truss, currently Foreign Secretary, is the frontrunner in the race, and many investors have criticized her proposed tax cuts as inflationary.

The cuts “will help struggling consumers in some ways, but also risk fueling inflation in a way that threatens to force the Bank of England’s hand on rate hikes,” said Chris Beauchamp, Chief Market Analyst at IG Group. in the comments sent by e-mail. “Truss faces the mother of all political headaches,” he said.

Home Builders, Retail Company

Among equity sectors, investors are particularly wary of UK homebuilders, utilities and retailers.

Companies like Persimmon Plc and Barratt Developments Plc have seen their market values ​​halved this year as the Bank of England launched a program of rate hikes to fight inflation, while the FTSE 350 Retailers Index has fell by around 35%, reflecting the contraction of the British. disposable income.

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“Mortgage rates have jumped this summer and are expected to lead to falling housing demand and lower prices starting this fall,” HSBC analyst John Fraser-Andrews wrote in a note on Friday as he downgraded. seven home builders.

Utilities may also struggle, “particularly electricity and gas providers, as they appear at the heart of the cost of living crisis,” said Tineke Frikkee, head of UK equity research at Waverton Investment Management.

Retailers, meanwhile, are hoping the new prime minister will announce support for households, freeing up cash for non-discretionary spending.

“Significant reductions in income tax, national insurance or VAT can help support domestic consumption and provide some relief to retailers,” Ben Ritchie, head of UK equities, said by email. and European at Abrn.



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