The collective performance of companies in the FTSE 100 index of UK blue-chip stocks faltered in the first half of 2023, with other major markets worldwide leaving it trailing in their wake, writes Andrew Michael.
This is in contrast to 2022, when the FTSE 100’s modest gain of around 2% outshone most of its international counterparts.
Last year’s tough economic conditions were particularly damaging to so-called growth stocks – companies expected to outperform their peers and epitomised by a handful of US corporate technology titans. This sent barometers of US corporate performance into a tailspin, with the falling around 18% on the year, after taking account of returns from dividend payments.
Similarly hard hit was the Eurostoxx 50 index of continental Europe’s largest businesses, which saw a 14% decline during 2022.
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Having survived last year’s turbulence, hopes were high that the FTSE 100 would power ahead in 2023 thanks to its high proportion of companies perceived as resilient and hailing from sectors such as energy, mining and banking.
But, in the first six months of 2023, the Footsie’s performance has been virtually flat. in stark contrast to the performance of major indices elsewhere. In Europe, for example, the German Dax has risen by around 14% year-to-date, while the French Cac 40 is up 12% over the same period.
Victor Trokoudes, chief executive officer of Plum, said: “The French stock market has been a notable performer in 2023 so far, propelled by the performance of standout luxury brands such as LVHM and Hermès. In fact, this growth has been so strong that Bernard Arnault, LVHM’s chief executive, became the richest man in the world temporarily.
“How long this momentum can continue for the rest of the year is not clear, especially given that the Cac’s strong performance is so highly driven by those luxury brands. The over-performance of LVHM has been supported by higher spending from Chinese consumers following the end of China’s ‘zero-Covid’ policy. If the Chinese economy does start picking up more – with interest rates being cut to support spending – then luxury brands like LVHM could receive an even bigger boost.”
US performance
The markets of some of the UK’s closest geographical neighbours have clearly kicked on this year, but it is developments across the Atlantic and further afield that are attracting the attention of investors.
Take the performance of the US-based Nasdaq, the world’s second-largest stock market behind the New York Stock Exchange and the exchange of choice for companies in the information technology and biotechnology sectors.
Nikos Tzabouras, senior market specialist at FXCM, said: “The Nasdaq is having an amazing year so far. It is outperforming its US peers, registering gains of more than 30% during the first half of 2023, and has been propelled into a bull market [having risen by 20% from October last year].
“The rally of the tech-heavy index is being driven by the generative artificial intelligence (AI) revolution, sparked by OpenAI’s conversational chatbot, ChatGPT, which took the world by storm.”
A rebound in the fortunes of US tech companies, including a spate of encouraging earnings reports, has also provided a welcome boost to the S&P 500 in the half-year to June, with the index standing around 15% higher than at the start of the year.
Rob Morgan, chief investment analyst at Charles Stanley, said: “The strength in US technology giants has been the main characteristic of the first half of the year. A narrow band of stocks, the so-called ‘magnificent seven’ – Apple, Microsoft, Nvidia, Tesla, Alphabet, Amazon and Meta – have dominated returns from global market indices, pulling them out of 2022’s bear market.
“The S&P 500 is up around 15% year to date, but without the magnificent seven there would hardly be any rise at all. The Nasdaq, meanwhile, which is more concentrated in those particular names, is up around a third year-to-date.
Sanjay Rijhsinghani, chief investment officer at LGT Wealth Management, said: “Companies like Nvidia are not only posting strong results, but also substantially upgrading their revenue outlook – all this at a time when inflation, tighter lending standards and a global slowdown is adversely impacting other global stock indices.”
Charles Stanley’s Rob Morgan added: “The rest of the US market has more or less gone nowhere over the period. The magnificent seven are seen as offering growth in a low growth world, and a number of them stand to benefit from advances in AI, a theme that has captured investors’ imaginations.”
Impact of AI
Despite the strong rebound in the fortunes of the US market, Janet Mui, head of market analysis at RBC Brewin Dolphin, warned it was unclear whether this trajectory would last: “Economic data has been resilient, inflation has slowed and traders were positioning for a Fed pivot [on interest rates].
“We are positive on the longer-term benefits from AI on productivity and corporate profitability, but the AI frenzy and valuations of some AI-exposed stocks have become over-stretched.
“We still think there is a high chance of a mild US recession next year and the Fed is unlikely to cut rates soon as core inflation remains elevated.”
Another standout performer this year has been Japan, where markets have been hitting highs last seen in the 1990s. Since late May, the Nikkei 225 has broken through the 30,000 level, a feat not achieved in more than 30 years, although the index remains some way off its all-time high of just shy of 39,000 reached at the end of 1989.
Commentators highlight a combination of events that have prompted a resurgence in the Japanese. Kasim Zafar, chief investment officer at EQ Investors, noted: “The Tokyo Stock Exchange has encouraged companies to have better balance sheet management to serve shareholders better.”
Charles Stanley’s Rob Morgan said: “The Bank of Japan has continued to pursue loose monetary policy in the face of global inflation, so the yen has sold off against other currencies, improving the competitiveness of Japanese exports and flattering their overseas earnings.”
Neil Shah, a director at Edison Group, said: “Undoubtedly, attractive valuations coupled with China’s economic resurgence – for which Japan stands to be a prominent beneficiary – have fuelled this growth.”
In the UK, despite the presence of oil companies and other cash-generative stocks, the FTSE 100 lacks the technology companies found more commonly in the S&P 500 that have benefited from the buzz surrounding AI.
Political turbulence
In addition, the UK has been blighted by a prolonged period of sticky inflation as well as a turbulent 12-months in its political landscape.
Mr Morgan said: “Relative underperformance has extended to the UK where, following a decent start to the year, the FTSE 100 is now slightly lower, with resources and commodity stocks weighing heavily. Much of this is down to weaker growth in China and investors dialling-back expectations for the world’s second largest economy.
“More broadly, investor sentiment towards the UK has been febrile in face of the more persistent inflationary outlook and an economy facing the headwind of higher interest rates taking their toll on consumers and businesses. However, it may be that the resilience of company earnings and the scope for increasing merger and activity provide some positive surprises over coming months that help underpin the market.”
James Hughes, investment manager at Quilter Cheviot, pointed out that the composition of the Footsie versus the S&P 500 is very different: “The FTSE is dominated by oil, gas and mining companies and financials. A weaker oil price and analyst expectations of lower earnings has meant the oil majors are negative on the year, with BP down 5% and Shell down 0.2%. The mining companies have been impacted by a negative China outlook, characterised by a weaker consumer picture and political risk, and this has led to almost all commodity prices easing.
“Financials started the year well as they usually benefit from a rising rate environment. But the regional bank crisis in the US spread across the whole sector and share prices have not recovered. In the background, there’s also a political pressure to treat savers and borrowers more fairly.”
Quilter Cheviot’s James Hughes added: “In general investors are also increasingly cautious of the UK economy. We have a bigger inflation problem than most of the West and mortgage holders are the second most sensitive to interest rate hikes, behind Sweden, across developed markets. Despite the FTSE 100 being largely an index of global businesses, overseas investors still look at the FTSE 100 as a UK economy-linked index.”
Peter Toogood, chief investment officer of Embark Group, said: “It is increasingly clear that growth stocks are once again driving global equity markets and the FTSE 100 has precious few of these, especially in the technology, luxury goods and media sectors.
“Equally, the FTSE has suffered a significant drag from its exposure to the likes of healthcare, energy, and tobacco, all of which have underperformed this year. Compounding these pressures is the ongoing liquidation of UK equities by both international investors and UK-based investors who increasingly favour global benchmarks.”
Another market failing to fire so far in 2023 is China. LGT Wealth Management’s Sanjay Rijhsinghani said: “From our perspective, the biggest surprise in the first half of this year has been the underperformance of Chinese equities.
“There were expectations that, post the abandonment of the country’s zero COVID policy, we would witness a similar pick-up in its economy as was seen in Europe and the US. However, any revival we’ve seen in China has been short-lived. Though the economy is in reasonably good shape, the pick-up in growth has been below expectations.”
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Andrew Prosser, head of investments at InvestEngine, acknowledged it can be a useful exercise to reflect on market movements over a relatively short-term, but said investors ultimately need to pay most attention to longer time horizons: “It may be tempting for investors to adjust their portfolios based on their predictions for the second half of the year. This approach, however, should be avoided.
“Increasing returns through short-term market calls is impossible to achieve consistently, given how much noise is contained in these market movements. Instead, investors should keep their eyes on the long-term, and ensure their portfolio’s risk level is consistent with their ability and willingness to take investment risk, and also that their portfolio continues to be adequately diversified by asset class, region, sector, and currency.”