By Jamie Chisholm
The latest bounce on Wall Street is yet another reminder that there’s money to be made by nimble traders with a short-term view if they look to buy when the market mood feels overwhelmingly grim.
So, when Liberum Capital this week told Bloomberg that investors thought political and market storms made the U.K. currently “uninvestable,” contrarian alert klaxons should have been screaming.
Such dismissive hyperbole often provides opportunity as investors struggle with nuance. And that’s exactly what’s happening in the U.K., reckons Matthew Gilman, strategist at UBS.
“The FTSE 100 is not the U.K. economy,” he stresses in a note published this week.
Yes, Great Britain is likely already in recession, and while support may come from the government’s now infamous fiscal largesse, that will be counteracted by the dislocation in credit markets and higher interest rates from the Bank of England.
But only “about a quarter of FTSE 100 /zigman2/quotes/210598409/delayed UK:UKX -0.19% revenues are generated in the UK, so the global economy matters much more than the domestic backdrop”, says Gilman.
The blue-chip index’s top five constituents — Shell /zigman2/quotes/205095589/composite SHEL -0.38% /zigman2/quotes/206428183/delayed UK:SHEL -2.54% , AstraZeneca /zigman2/quotes/200304487/composite AZN +0.90% /zigman2/quotes/203048482/delayed UK:AZN +0.30% , HSBC /zigman2/quotes/208272822/composite HSBC -0.83% /zigman2/quotes/203901799/delayed UK:HSBA -2.32% , Unilever /zigman2/quotes/204685760/composite UL +1.67% /zigman2/quotes/205449809/delayed UK:ULVR +0.86% and Diageo /zigman2/quotes/208129584/composite DEO +1.99% /zigman2/quotes/205611832/delayed UK:DGE +1.00% , which together make up about a third of its market capitalization — exemplify the Footsie’s international nature. The next five biggest — BP /zigman2/quotes/207305210/composite BP -0.08% /zigman2/quotes/202286639/delayed UK:BP -1.62% , BAT /zigman2/quotes/209116881/delayed UK:BATS 0.00% , Glencore /zigman2/quotes/201400686/delayed UK:GLEN -1.21% , GSK /zigman2/quotes/209463850/composite GSK +1.68% /zigman2/quotes/200381158/delayed UK:GSK +0.61% , and Rio Tinto /zigman2/quotes/202627887/composite RIO +1.40% /zigman2/quotes/208934945/delayed UK:RIO +0.23% — do the same.
The weak pound /zigman2/quotes/210561263/realtime/sampled GBPUSD +1.6421% is thus a boon, providing a material boost to corporate earnings as overseas profits are converted back into sterling, and improve the competitiveness of exporters, supporting equities, according to Gilman.
Another factor that has underpinned the Footsie of late, which is down 7% this year compared to Europe-wide Stoxx 600’s /zigman2/quotes/210599654/delayed XX:SXXP +0.89% 19% decline, is its sector mix.
“The FTSE 100 is a value market that’s heavily skewed toward commodities and defensive sectors. Oil & gas companies make up around 13.5% of the index and is one of our most preferred global sectors as it will help buffer against higher oil and gas prices as we navigate an energy crisis,” says Gilman.
His other preferred global sectors—healthcare and consumer staples—are also large weights in the Footsie and should provide relative protection against slowing economic growth, he argues.
“In aggregate, our preferred global sectors make up around half of the FTSE 100. With the FTSE 100 trading on a forward P/E of 8.9x — a 29% discount to its 20-year average — with a 4.6% prospective dividend yield, valuations are attractive and…continue to support our relative preference for UK equities, in spite of the domestic challenges,” Gilman concludes.
Tempted? The U.S.-based investor can utilize ETF’s like the iShares MSCI United Kingdom /zigman2/quotes/203635666/composite EWU +1.09% . It’s not a perfect tracker of the Footsie but the main constituent weightings pretty much match the London barometer.
And for those concerned about foreign exchange risk, there is the iShares Currency Hedged MSCI United Kingdom ETF /zigman2/quotes/203506644/composite HEWU -0.61% .
S&P 500 futures /zigman2/quotes/209948968/delayed ES00 -0.21% fell 0.5% to 3738 as traders reacted to the September jobs report. The dollar index /zigman2/quotes/210598269/delayed DXY -0.92% rose 0.2% to 112.40 and the benchmark 10-year Treasury yield /zigman2/quotes/211347051/realtime BX:TMUBMUSD10Y -1.27% rose 5 basis points to 3.87%. WTI crude futures /zigman2/quotes/211629951/delayed CL.1 +2.00% added 0.5% to $88.90 a barrel as the market continued to assess the impact of a deal by the OPEC+ cartel to cut production by 2 million barrels a day.