Trading across the pond

02/15/22
  • British stocks have outperformed the US—and most of the globe—in recent months
  • Temporary relative strength or potential for longer-term trend?
  • UK market may have fundamental advantages in new environment

As noted in “Volatility wake-up call,” the UK was one of the brighter spots in the international equity landscape last month after being one of the weaker performers of the past five years. The UK’s benchmark FTSE 100 stock index gained 14.3% in 2021—just a little more than half the S&P 500’s (SPX) 27% return.

As of Monday, though, the FTSE was up around 2% this year, compared to a nearly 9% loss for the SPX. Take a look at how three FTSE financial stocks—HSBC (HSBC), Barclays (BCS), and Lloyds Banking (LYG)—have performed since mid-December:

Chart 1: HSBC (HSBC), Lloyds Banking (LYG), Barclays (BCS), S&P 500 (SPX), 12/10/21–2/14/22. UK financial stocks price chart. British stock market. UK rebound.

Source: Power E*TRADE. (For illustrative purposes. Not a recommendation.)


True, this chart starts right around the time the UK market began to pull away from the US, and the majority of the outperformance occurred in the first two weeks of January. Nonetheless, Morgan Stanley's European Equity Strategy analysts have cited a few reasons why the FTSE could continue to outperform:

1. Attractive mix of offense and defense. Defensive sectors account for 37% of UK market capitalization (more than any other major country or region), and the FTSE has outperformed the wider European market two thirds of the time when stocks are falling globally. In terms of “offense,” Morgan Stanley points out the UK market’s sector mix gives it a positive correlation to “real” bond yields (i.e., the yield minus the inflation rate). That’s a potential plus in a rising-rate environment. The FTSE has a significant weight in value sectors, such as commodities and financials, which tend to perform best when real yields are rising. (Even in the US, the financial sector has held up fairly well during the recent sell-off.)

2. The FTSE is “cheap.” Morgan Stanley’s analysis suggests UK stocks haven’t been this undervalued vs. the global market since the 1970s. In addition to a price-to-earnings (PE) ratio below that of the S&P 500 and Europe, the FTSE’s 3.6% dividend yield is roughly twice the global average.

3. Low expectations. With consensus earnings expectations very low, Morgan Stanley sees the potential for subsequent upgrades that could support price outperformance. Energy stocks, which accounted for 25% of all UK profits in 2021, could be a key driver in this regard, given the potential for oil prices to top $100 later this year.1

While these may sound like attractive characteristics for investors, they’re far from irrelevant for traders. “Stock weakness, sector strength” noted the tendency of traders to focus on pockets of relative strength when the broad market isn’t on bullish autopilot. Those pockets can sometimes be a country or region, as well as a sector or an industry.

Market Mover Update: March palladium futures (PAH2) rallied more than 6% on Monday after gaining 2.6% on Friday (see “Exhaust vs. exhaustion”). Rivian (RIVN) jumped more than 11% intraday yesterday amid reports that investor George Soros had taken a stake in the electric vehicle maker.2 The stock landed on a few LiveAction scans for unusual options activity, including largest number of trades:

Chart 3: LiveAction scan: Largest number of options trades, 2/14/22. Unusual options activity. Options traders active in RIVN.

Source: Power E*TRADE. (For illustrative purposes. Not a recommendation.)


Today’s numbers include (all times ET): Producer Price Index, PPI, 8:30 a.m.         

Today’s earnings include: Zoetis (ZTS), Marriott (MAR), LGI Homes (LGIH), SolarEdge (SEDG), Q2 Holdings (QTWO), Airbnb (ABNB), Upstart (UPST), Roblox (RBLX).

 

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1 MorganStanley.com. Feeling Positive About UK Equities. 2/8/22.
2 Barron’s. George Soros Buys a Big Rivian Stake. 2/14/22.

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