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After a decade of abysmal returns and a multi-billion-dollar investment exodus, the wait is on to see if 2024 will be the year Britain’s stock market breaks out of its downward spiral.

Most strategists do expect things to look up a bit for a market with the cheapest shares in the developed world. Yet a decisive turnaround looks elusive.

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For one, they have been repeatedly disappointed: London’s FTSE all-share index has lagged global equities in nine of the past 10 years in dollar terms. In 2023, it has inched up two per cent, while euro-area and U.S. peers notched double-digit gains. And since the 2016 Brexit vote, a total of US$100 billion has fled U.K. stock funds, Barclays PLC estimates, citing EPFR Inc. data.

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The result is a “self-fulfilling” prophecy that keeps the market trapped in a cycle of outflows and losses, said Jerry Thomas, head of global equities at Sarasin & Partners LLP.

He expects an uptick in 2024, as interest rates fall and investors funnel some money out of U.S. Big Tech. Analysts surveyed by Bloomberg News expect the FTSE 100 to finish next year 5.9 per cent above its Dec. 6 closing price — on par with forecasts for the S&P 500. But the broader hurdle remains.

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“It’s difficult to find buyers for U.K. equities,” Thomas said. “There are constant outflows from U.K. equity funds, so fund managers are having to sell, depressing the market even more.”

It’s all taken a toll on the U.K. market’s value, which has dropped by a fifth in the past decade, even as a global index compiled by Bloomberg had an 80 per cent capitalization jump. Paris overtook London last year as Europe’s biggest bourse, while Mumbai, which surpassed it in size in 2021, is already US$1.1 trillion bigger.

More bad news emerged on Dec. 15, as the main investor in Pearson PLC suggested the publisher ditch the FTSE 100 and list in New York.

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“A third year of a relatively static outlook looks likely for the FTSE 100,” Bloomberg Intelligence strategists Tim Craighead and Laurent Douillet said in a note on Dec. 18. “The possibility of fading interest rates may be a challenge for its banks and insurers, China looms large for the miners, and sterling’s strength can hurt international profits.”

Still, investors say they do find opportunities in the United Kingdom, where shares in giant multinationals often trade cheaper than overseas-listed peers. Priced below 10 times forward earnings — almost half where the S&P 500 trades — Britain will lure bargain hunters at some point, lightening the gloom, they expect.

Optimists point to the prospect of Bank of England rate cuts in 2024, which would ease a brutal cost-of-living squeeze and property slump.

Schroders PLC fund manager Matthew Bennison recently increased his holdings of U.K. domestic shares, predicting them to benefit from lower interest rates. Given “screamingly cheap” share valuations, “this area of the market looks poised to perform very well over the next three to five years,” he added.

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With borrowing costs poised to slide, Sharon Bell, European strategist at Goldman Sachs Group Inc., withdrew a recommendation to short-sell British real estate shares. But she acknowledged the FTSE’s longer-term malaise.

“The U.K. stock market suffers from a lack of committed domestic investors,” Bell said in a note. “We think this accounts for some of the discount.”

That vulnerability was underscored recently by official data that showed pension funds’ holdings of U.K. equities had dwindled to 1.6 per cent at the end of 2022 — a new record low.

The number of U.K.-focused open-end funds and exchange-traded funds tracked by Morningstar Direct has shrunk to 463, down from 484 at the end of last year. The tally a decade ago was 542.

Missing tech

Chipmaker Arm Holdings PLC’s choice of New York for its stock market debut was a major blow this year for the FTSE, which is already lacking in high-performing technology shares — London accounts for just four per cent of the Stoxx 600 technology index.

Nor does it have the engineering and luxury goods multinationals that boosted Frankfurt and Paris to record highs this year.

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“These sectors have structurally-higher earnings growth than the rest of the market, as they benefit from secular themes like artificial intelligence and electrification,” Nataliia Lipikhina, head of EMEA equity strategy at JPMorgan Private Bank, said.

For that reason, she prefers European markets to the FTSE, which is dominated by energy and miners.

UBS Global Wealth Management also expects London’s sector composition to drag on earnings. Despite seeing some eight per cent upside next year for the FTSE 100, UBS has been allocating away from U.K. stocks, seeing their outlook as weaker than many other markets, said Kiran Ganesh, a multi-asset strategist.

At the end of the day, Britain has become “a somewhat isolated market in the context of a global portfolio, which investors outside of the U.K. don’t really need to bother with,” he said.

— With assistance from Sagarika Jaisinghani and Sujata Rao.

Bloomberg.com

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