While UK equities failed to keep pace with global equities in 2020, the country’s fortunes seem to have shifted since the start of the new year. A broad rotation into value, further supported by a relatively successful vaccine roll-out and favourable EPS forecasts, have helped the FTSE All Share to outpace FTSE World year to date. Could the outperformance continue?
UK equities: left behind in 2020, starting strong in 2021
In the market volatility of 2020, most equity markets ended the year with reasonably strong returns. The FTSE World index rose 16.3% on the back of unprecedented stimulus from central banks.1 One market, however, was left behind.
The FTSE All Share index endured a fall of 9.8% in 2020, held back by uncertainties around Brexit and large exposure to the Energy and Financials sectors, which were among the hardest hit sectors by the COVID-19 crisis.2 The UK index being significantly underweight the Technology sector, which rallied significantly, also held it back.
However, following the announcement of the vaccine approvals last year, the UK enjoyed a significant bounce and has continued to perform well in 2021 on the back of the reflation trade seen across markets. Year to date, the FTSE All Share is up 5.3% versus a 3.5% rise in the FTSE World index.3
There is reason to believe that the UK could continue to benefit from the reflation trade and value rally. As Figure 2 shows, despite the rally UK markets have seen recently, the UK remains significantly below other regions on a price to earnings basis, currently at a discount of roughly 25% to the FTSE World index.
Regional estimates of earnings per share (EPS) growth forecasts, compiled by FTSE, also show that the UK is expected to see a significant rise in EPS compared to other regions, currently estimated to grow at over 60% in 2021.4 The UK has seen a fairly large improvement in EPS estimates over the last 3 months, rising from consensus estimates of 53%.5
The UK, despite an initial slow start, has also seen a very successful vaccine program compared to other countries. More than 33% of the UK population is now vaccinated, compared to 22% in the US and only 6% in Europe. This has led many to be optimistic that the UK could begin to re-open its economy more quickly than other countries, which could help to ease some of the pressure felt by UK consumer lending banks.
In addition, several exogenous factors have helped support UK equities more recently, such as an unexpected rise in the oil price following attacks on Saudi Arabian oil facilities. Many analysts expect that the oil price could rise further as demand for oil increases as economies re-open.
How to access this theme
Investors looking to gain exposure to UK equities can do so through the SPDR FTSE UK All Share UCITS ETF. To learn more about the fund, and to view full performance history, please visit the fund page.
Source: Bloomberg Finance L.P., for the period 4-11 March 2021. Flows are as of date indicated and should not be relied upon as current thereafter. This information should not be considered a recommendation to invest in a particular sector or to buy or sell any security shown. It is not known whether the sectors or securities shown will be profitable in the future.
1 Source: Morningstar Direct, as of 10 March 2021.
2 Source: Morningstar Direct, as of 10 March 2021.
3 Source: Morningstar Direct, as of 10 March 2021.
4 Estimates are based on certain assumptions and analysis. There is no guarantee they will be achieved.
5 Source: Morningstar Direct, as of 10 March 2021.
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