The start of 2021 was rocky for the UK. Leaving the European Union sparked enormous bureaucracy that has desperately sought help from some industries, and the country is once again in lockdown due to a rapidly spreading strain of the coronavirus.
But there was a glimmer of hope. In the UK, more than four million people have been partially vaccinated against the coronavirus, a promising rate of vaccination.
Investors seeking a wave of optimism about vaccine rollouts have turned to the UK stock market, which had a strong start to the year, rising more than 6 percent in the first week.
In the first two and a half weeks of January, the FTSE 100, the UK’s benchmark index for large companies, rose 4.3 percent, outperforming the S&P 500 index, which was up 2.6 percent, and the Stoxx Europe 600 index, which was up 3 percent. Even when the profits are converted into US dollars, the FTSE 100 still has a clear head start.
In addition to the introduction of vaccines to help secure an economic recovery, another factor is attracting investors: the relative cheapness of UK stocks.
The UK FTSE 100 index benefits from an investment strategy in which traders buy so-called value stocks. These are companies that are believed to be trading below their real value because their business has been disrupted by a recession, particularly in the financial and energy sectors, and the FTSE 100 has a large stake in these stocks.
Citigroup analysts have made the UK stock market their “preferred” stock market.
“I would like to stress that the very unloved and terribly horrific UK market might be worth a look this year,” said Robert Buckland, a Citigroup equity strategist, in a presentation last week. “We all know it’s been a place to avoid for many, many years.”
Updated
Jan. 21, 2021, 8:46 ET
The UK stock market has been lagging behind for years. The last time the FTSE’s earnings looked better than the US and European benchmarks was in 2016, when a sharp fall in the pound boosted the profits of the FTSE 100 companies, which have three-quarters of their sales overseas.
When converted to US dollars, the FTSE 100’s annual return was the worst of the three indices over the past nine years.
Why are investors now betting on a trend reversal? For one, a lot of them are ready for a bargain. The bull market for stocks has been dominated by expensive stocks in American tech companies, which makes some investors nervous about how much they can go further. An alternative is cheap stocks in industries that tend to do well in times of economic recovery.
And then there is the UK’s free trade agreement with the European Union. Some investors put aside the details of whether it was a good deal or a bad deal to make it easier for an agreement to finally be reached in late December.
The deal “reduced the uncertainty of the overhang people,” said Caroline Simmons, the UK’s chief investment officer at UBS Global Wealth Management. And it could encourage the return of foreign investors who were deterred by Brexit, she said. Up until last week, the Swiss asset management company stated for the first time since 2013 that UK stocks were among its most preferred deals.
Two Schroders wealth managers in London are hoping that interest in large companies will return to smaller companies that are lagging behind. Rory Bateman and Tim Creed raised £ 75 million ($ 102 million) in December for their British Opportunities Trust, a fund that will invest in public and private companies that are affected by the pandemic but that they expect to be they recover with a little more capital.
The vaccines were the “beginning of the mood reversal in Britain,” Bateman said. “The momentum is definitely shifting.”
However, this strategy depends heavily on the success of the vaccine launch and can easily be reversed by signs of delays in manufacture or distribution. And the UK stock index could fall back to the bottom of the stack.
