While the US market has recovered all its losses, the UK market is still way behind where it was at the start of the year.?
The S&P 500, the US’ main stock market, has now fully recovered all its losses for the year following a rally on Monday (9 June). Meanwhile, the Nasdaq composite index, an index of technology-focused stocks, set new a record high.
While there is still the prospect of a second wave of coronavirus and therefore potentially another lockdown, for now markets are broadly optimistic that the US economy will be able to stage a strong recovery.
For UK investors, the latest rally now means that measured year-to-date, the S&P 500 has provided a total return of 5.03% in sterling terms (a stronger dollar has helped to boost returns for UK investors counting their returns in pound sterling). Meanwhile, the Nasdaq index has provided a return of 15.92% in sterling terms.
Those returns stand head and shoulders above that provided by the UK’s main indices. Measured since the start of the year, the FTSE 100 has provided a total return of -12.9%. Similarly, the FTSE 250 has lost 16.5% and the FTSE All-Share has lost 13.5%.
There are several reasons for the difference in performance. The US market has been in recovery since the end of March, consistently staging strong rallies. This was largely the result of the composition of the US market.
The UK’s main indices lean?heavily towards banks and energy companies. Low interest rates and low oil prices have not boded well for companies in this sector. In comparison, the US market is increasingly dominated by technology-related companies such as the so-called FAANG stocks (Facebook, Amazon, Apple, Netflix and Google). These companies, and other similar ones found listed in the US, have broadly continued to thrive in the pandemic.
This sector exposure also gives the US market a greater exposure to growth stocks relative to value stocks. The conditions that have seen investors favour growth over value (low interest rates, low economic growth, low inflation) have all continued or been exacerbated by the pandemic.
On top of this the UK market is also heavily dependent on dividend payers. A slew of companies have cut or suspended their dividends. The share prices of some of these companies will likely not fully recover until they either restore their dividend or start growing their payments again.
So ever since the initial sell-off the US market has raced ahead of its international competitors, including the UK.
However, now other parts of the US market have started to recover in this latest rally. As Mihir Kapadia, chief executive of Sun Global Investments, notes: “In the last two weeks, the pattern has changed as the beaten-down sectors,?which would benefit from the gradual lifting of the lockdown such as airlines, hospitality, cyclicals and industrials, have risen very sharply from beaten-down levels.”
Most notably, unemployment figures in the US for May were much better than expected. Economists had predicted a continued increase in unemployment numbers in May – instead, the actual numbers fell. Kapadia says: “With lockdowns easing and the spread of Covid-19 slowing, investors anticipate an increase in demand, which should support economic recovery.”
This optimism has buoyed markets around the world, including those in the UK, to some extent. After all, what is good for the US economy is broadly good for the world economy.
However, when it comes to the UK, several risks are still hanging over the UK economy. These include the prospect of a no-deal Brexit and the potential for the government to embark?on a new round of austerity.
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