Astute Market Overview - 25th January 2023
In this week’s UK-centric Astute Market Overview, we’ll explore why even though we are physically in the UK (working, living, paying tax), the UK economy is not a primary driver of UK investment performance.
The FTSE 100 is often misquoted as representative for markets as a whole, despite only representing a proportion of a globally diversified portfolio. The index contains the 100 biggest companies listed in the UK by market capitalisation. A large percentage of the index is made up of companies that fared well in 2022 (energy stocks being a prime example), and so the FTSE 100 flirted with its all-time high to start the week.
Whilst the index didn’t quite pass its peak set in 2018, the high level seems like an obvious disconnect from everything else we know about the UK economy: high inflation, increasing interest rates, mini-budget melt-down, a potential recession looming etc.
However, given a large proportion of the index’s company revenue is generated outside of the UK, the FTSE 100 isn’t representative of the UK economy. But, if we shift our gaze from the FTSE 100 to the FTSE 250 (the next 250 biggest companies), the story is very different. This index is more closely related to the UK economy, and fell by nearly 20% in 2022.
Since our last update we had UK GDP for November 2022 (vs October 2022) which showed that the economy grew by 0.1%, a shock to economists who broadly expected a decline. We’ve previously commented that recessions might prove to be shallower than feared, however we don’t think that the UK will avoid one altogether, despite the reprieve that narrow growth in Q4 2022 provided.
Turning to inflation data, we’ve had releases of CPI inflation from the UK and eurozone. At 10.5% in the UK and 9.2% in the eurozone, both readings showed another month of cooling inflation for these regions, but only slightly.
Andrew Bailey, the Governor of the Bank of England, felt comfortable enough with two consecutive months of disinflation, to say that “a corner has been turned”, however that doesn’t mean that interest rate increases are over yet. Bailey also hinted that 4.5% could be the peak for rates for this cycle, which is still a way off from the current base rate of 3.5%.
Last week also saw the World Economic Forum Annual Meeting in Davos, with a jam packed schedule of leaders and great minds from across the world, there is plenty for us (and you) to read, watch and digest.
The week ended with Chinese New Year celebrations – markets in China will close this week to continue the national holiday.
Over this coming week, the data we will be watching includes:
- PMI data, and
- US GDP.
We’re back next week – see you then.