Sentiment rolled over now equities are doing the same
Below is a link to the BBC World Service Business Matters programme, and we have included the audio extract from the interview with Paul Sedgwick on this page.
We have attached a chart that highlights the underperformance of leading UK equities over the past five years. As you can see the FTSE 100 in absolute terms is roughly where it was before the Brexit vote. The FTSE 100 is expected to react to changes in sterling as many of company’s in the index earnings come from abroad. This correlation seems not to have played out so well as sterling has fallen over 10% in the same period, mainly as Brexit uncertainties continue. Fund managers have been underweight UK stocks, and rightly so as it appears. The latest Merrill Lynch Fund Manager Survey would indicate that fund managers are reversing this trend modestly. Brexit takes much of the blame for the lack of performance, however, the FTSE 250 which is less exposed to international markets and more exposed to the domestic economy is up over 20% in a similar period. If anything, that sector of the market should see a more significant impact by the Brexit uncertainty. Not even the attractiveness of UK dividends relative to gilt yields appears to have enticed investors.
The reality for the underperformance can probably be found in the weightings of individual sectors, and not the Brexit effect. For a start, the FTSE 100 has 1% exposure to technology, the most significant growth area over the past few years. Energy and materials, oil and mining predominately, make up nearly 30% of the index, followed by banks, another 20%. Neither can be considered areas of growth in the past five years. Consumer staples make up 15% of the index weighting, good stable companies but not more so than as a modest GDP plus sector. One can easily see why the FTSE 100 remains unloved to a large extent.
We pointed out that equity markets tend to follow downwards as sentiment rolls over. This again appears to be the case. The CNN sentiment index has been slowly retreating from extreme greed, while the S&P 500 had continued to climb. Equity indexes this week have retreated as some of the concerns have resurfaced. On Wednesday the minutes of the last Fed meeting indicated that the members see little need for further rate cuts this year. The impeachment enquiry seemed to take a turn for the worse for Mr Trump as the EU Ambassador appeared to undermine the president in his statement. The China-US trade talks, which investors had appeared less fearful of the outcome, appear to be stalling.
Nigel Cassidy invited me to appear on his show Business matters. Above is the link. We discussed markets, the Santa rally, China, and Trump potential impeachment.