London Lost Its Markets Crown to Europe in the Year
London Lost Its Markets Crown to Europe in the Year
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The year has been dramatic for UK markets.

The onset of a recession, inflation at a 41-year high, the resignation of two prime ministers, and the highest number of strikes since Margaret Thatcher in the 1980s have all contributed to selloffs in domestic stocks and government and corporate debt.

The sell-off in many assets has occurred as Britain faces a potentially more severe cost-of-living crisis than other developed economies. This is due in part to increases in a household-energy price cap, as well as shorter-term mortgage payments being more sensitive to rising central bank rates. Meanwhile, Brexit is causing supply chain issues for businesses.

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Indexes tracking locally-exposed shares and bonds have lost approximately £550 billion ($672 billion) in market value.

“It’s been a really difficult year,” said Anna Macdonald, a UK small-cap equities fund manager at Amati Global Investors in Edinburgh. “Valuations are painting a bleak picture.”

Here’s a look at what happened in UK markets this year:

London has been dethroned.

This was the year that the United Kingdom lost its position as Europe’s largest stock market. According to Bloomberg data, the combined market capitalization of primary listings in Paris, excluding ETFs and ADRs, was $2.97 trillion as of Dec. 15, compared to $2.95 trillion in London.

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Not only did France overtake London, but India and Saudi Arabia did as well. Saudi stocks benefited this year as Brent crude reached a high of nearly $140. Saudi Arabian Oil Co., also known as Saudi Aramco, accounts for more than half of the exchange’s market capitalization and is the world’s third-largest company.

Pound’s tumultuous year

In late September, then-Prime Minister Liz Truss and Chancellor of the Exchequer Kwasi Kwarteng announced a slew of unfunded tax cuts in their so-called mini budget.

Investors were concerned about the increase in government borrowing required to fund the policies, which roiled markets. The pound fell to an all-time low against the dollar of $1.0350, and despite a subsequent rebound as Rishi Sunak took over as Prime Minister, it is still on track for its biggest annual drop since 2016.

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Brexit, political turmoil, and the September episode have all tarnished the UK’s image,” said Chris Iggo, chief investment officer of AXA Investment Managers Core.

Gilt Yields Rise

UK benchmark 10-year yields have risen by more than two percentage points this year, the most since 1994. In order to keep double-digit inflation under control, the Bank of England raised interest rates at the fastest rate in more than three decades.

While yields have fallen since the mini-budget, “perceptions of fiscal credibility have not fully recovered,” according to BlackRock Inc. strategists in their 2023 outlook.

Corporate Debt Drought

Many sterling bond sales were halted due to this year’s volatility, with no transactions taking place in the two weeks following the mini-budget and the ensuing liability-driven investing (LDI) crisis, which necessitated a BOE intervention.

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At around £115 billion, including gilts, issuance fell to its lowest level since 2018, when investors were concerned about the UK’s inability to secure a Brexit deal.

Momentum in the FTSE 100

Meanwhile, the more international FTSE 100 stood out as a bright spot after underperforming since the UK voted to leave the European Union in 2016, owing in part to a lack of “growth stocks” in areas such as technology.

The weak pound benefited exporters, while rising commodity prices boosted profits for companies like Glencore Plc and Shell Plc. Non-cyclical sectors such as staple goods and healthcare boosted the FTSE as investors sought safe havens during the economic downturn.

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The FTSE 100 is the best-performing major developed market in local currency this year, despite being down 11% in US dollars, and is on track for its best outperformance versus euro-area peers since 2011.

Domestic Stock Doom

Bluechips have outperformed UK stocks. The FTSE 250 midcap index and another benchmark that tracks domestic-focused shares, the FTSE Local UK Index, are both down more than 20% year to date, the most since the 2008 global financial crisis. Concerns about the British economy, rising interest rates, and the fallout from Brexit have harmed sectors such as homebuilding, banking, real estate investment, and retail.

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The IPO Share Has Shrunk

London is losing ground in more ways than one. While it was a bad year for IPOs globally, the UK capital’s share of proceeds from European initial public offerings fell to its lowest level since 2009. According to Bloomberg data, listings in London have raised only £1.5 billion this year, accounting for 9% of the European total.

This year, London has seen no billion-dollar-plus IPOs, with only five deals raising more than $100 million.