Out with the old, in with the new
In the last trading day of the year and the week for most of the developed world, we saw some themes re-establish themselves, which could set the tone for 2021. The pound rose to its highest level since April 2018, and the dollar also remains weak. Stocks had a fairly miserable end to the year, the FTSE 100 was the worst performer in European stock markets, more of a function of a strong pound and enhanced lockdown measures rather than a symbolic sign of what the market thinks about the Brexit trade deal and the official end of the UK’s membership of the European Union.
Covid ruined the FTSE
The FTSE 100 is closing the year 14% below where it started. 2020 was the year that decimated the FTSE 100, Brexit fears and a huge number of Covid sensitive sectors such as banks, airlines and energy companies, have halted any attempt at a decent recovery and left the UK index trailing its US peers and some of its peers in Europe. In the short term, this under performance may not abate in Q1 due to the lingering concerns about Covid, the restrictions on air travel and the tier 4 lockdown. However, in the longer term we remain optimistic about the UK index for a few reasons.
Three reasons to support the FTSE 100 in 2021
Firstly, it remains a trusted index with plenty of world-renowned blue-chip companies in it. These companies did not provide much support from the covid-induced volatility this year, but these companies are still strong, creditworthy and will return to their former glory at some point in 2021. Secondly, some big companies in the FTSE 100 will restart dividends in 2021, and this should benefit the broad index. BP and Lloyds come to mind when it comes to expecting dividend announcements in Q1. Lastly, the index is cheap. NatWest, for example, has a P/E ratio of 6, yet with its market cap of more than £20bn and the prospect of a UK economic recovery later in 2021, as well as its focus on the domestic retail-banking market, NatWest could be one of the value picks that attract investors in the coming weeks. On the last day of trading in 2020, NatWest’s share price rose more than 1.2%, outperforming the overall FTSE 100, which could be a sign of things to come.
The FTSE takes the mantle from the pound as the barometer of Brexit risk for the UK economy
This does not mean that Brexit is not a risk for the FTSE 100 when trading in the new year re-starts again on 4th January. We need to see how the UK’s trade deal with the EU works in practice once it is implemented from Friday. If we see queues at ports once more or any shortage of fresh food at the supermarkets, then UK stock markets could struggle next week. Interestingly, now that we have left the EU, after what can only be described as a 4.5-year mud-slinging game, the pound is no longer the barometer of Brexit risk. We fully expect the same FX themes to continue in the first months of 2021: stronger pound and weaker dollar. However, the measure of whether the market thinks that the UK can make a success of life outside of the EU will be the performance of the FTSE 100. If the UK is to be a success outside of the EU, then we would look for gains of +15% this time next year. Roll on 2021.
Ending on an optimistic note
For now, there is some tentative optimism in the air for UK stocks in the next 12 months. Optimism that this will be the last round of lockdowns and covid restrictions, optimism that vaccines are around the corner, optimism that the UK’s tattered reputation will be rebuilt in the coming years now that we left the EU with a trade deal, and that our woeful covid response and high infection and death rates will be consigned to history and instead UK scientists will be remembered for bringing us a cost effective vaccine that will be made available to everyone, rich and poor.
For all of those reading this note, Happy New year and best wishes for 2021.