The Year London Lost Its Markets Crown to Europe

London is no longer Europe’s largest stock market. (File)

It has been a dramatic year for UK markets.

The onset of recession, inflation at its highest level in 41 years, two Prime Ministers resigning and the highest number of strikes since Margaret Thatcher in the 1980s helped to trigger a sell-off in domestic stocks and both government debt as well as corporate debt.

The multi-asset rout comes as Britain faces a cost-of-living crisis potentially worse than other developed economies. This is partly due to increases in the home energy price cap as well as shorter term mortgage payments which are more sensitive to the rise in central bank rates. Brexit, meanwhile, continues to cause supply chain disruption for companies.

In total, about £550 billion ($672 billion) of market value was stripped from the index that tracks locally exposed shares and bonds.

“It’s been a really difficult year,” Anna Macdonald, an Edinburgh-based UK small-equity fund manager at Amati Global Investors, said by phone. “The valuations are reflecting a pretty poor picture.”

Here’s a breakdown of what happened in the UK markets this year:

London De-Throned

This was the year that the United Kingdom lost its crown as Europe’s largest stock market. The combined market capitalization of the primary listings in Paris – excluding ETFs and ADRs – was $2.97 trillion as of December 15 versus London’s $2.95 trillion, according to data compiled by Bloomberg.

And it wasn’t just France that toppled London: India and Saudi Arabia overtook the UK too. Saudi Arabian stocks have benefited this year as Brent crude has peaked at nearly $140. Saudi Arabian Oil Co., also known as Saudi Aramco, comprises more than half of the foreign exchange market capitalization and is the third largest company in the world.

Indian firms have benefited from access to cheap Russian crude, according to Nick Payne, emerging market equity investment manager at Jupiter Asset Management.

The Pound’s Turbulent Year

UK markets experienced bouts of high volatility at the end of September as Prime Minister Liz Truss and then Chancellor of the Exchequer Kwasi Kwarteng announced a series of tax cuts not funded in their so-called mini budget.

The announcement rattled markets as investors shrugged off the increase in government borrowing that would be needed to finance the policies. Sterling fell to an all-time low of $1.0350 against the dollar and, despite subsequently recovering as Rishi Sunak replaced Truss as Prime Minister, remains poised for its biggest annual decline since 2016.

“The image of the United Kingdom has been tarnished by Brexit, by the political turmoil and by the episode we saw in September,” said Chris Iggo, chief investment officer of the AXA Investment Managers Core unit.

Gilt Yields Spike

UK benchmark 10-year yields have risen by more than two percentage points this year, the most since 1994. As the Bank of England raised interest rates at the fastest pace in more than three decades to put a lid on double-digit inflation.

And while yields have fallen since the mini budget, “perceptions of fiscal credibility have not fully recovered,” said BlackRock Inc. strategists. in their outlook for 2023.

Corporate Debt Drought

Many sterling bond sales have been put on hold through this year’s various bouts of volatility, with no deals in the two weeks following the mini-budget and the liability-led investment (LDI) crisis that resulted it required the intervention of the BOE.

At around £115bn including gilts, outflows fell to their lowest level since 2018, a time when investors were rattled by the UK’s struggles to secure a Brexit deal.

The FTSE 100 Moment

The more international FTSE 100 stood out as a strong point, meanwhile, after the UK voted in 2016 to leave the European Union, partly due to a lack of “growth stocks” in areas such as technology.

The weak pound benefited exporters, while good commodity prices spurred gains for Glencore Plc and Shell Plc. Non-cyclical sectors such as commodities and healthcare continued to underpin the FTSE, as investors sought safe havens during the economic downturn.

The FTSE 100 is the best-performing major developed market this year in local currency terms, down 11% in US dollars, and is headed for the biggest outperformer compared to peers in – the euro area since 2011.

Domestic Stock Doom

The outperformance of UK stocks was limited to bluechips. The FTSE 250 midcap index and another benchmark that tracks country-focused shares, the FTSE Local UK Index, are both down more than 20% year-to-date, mostly since the global financial crisis of -2008. Worries about Britain’s economy, rising interest rates and the fallout from Brexit have left sectors such as housebuilding, banking, real estate investment and -retail sales.

Still, the dynamics for UK stocks could change next year, according to Susana Cruz, strategist at Liberum Capital Ltd. She expects British midcaps to beat the big caps as inflation eases and the dollar weakens.

Shrinking IPO Share

It’s not just on market value that London is losing out. While it was a bad year for IPOs globally, UK capital’s share of the proceeds of European initial public offerings fell to its lowest level since 2009. According to data compiled by Bloomberg, listings in London raised just £1.5 billion this year, accounting for 9% of the European total.

London hasn’t had a single billion-dollar-plus IPO this year, and only five deals have raised more than $100 million.

(Except for the headline, this story has not been edited by NDTV staff and is published by a syndicated feed.)