The year London lost its market crown to Europe

It’s been a dramatic year for UK markets.

The onset of recession, inflation at a 41-year high, the resignation of two prime ministers and the most strikes since Margaret Thatcher in the 1980s helped trigger the selloff in both domestic stocks and government and corporate debt.

Many properties have declined as Britain faces a potentially harsher cost-of-living crisis than other developed economies. This is partly due to an increase in a household-energy price cap, as well as short-term mortgage payments being more sensitive to rising central bank rates. Meanwhile, Brexit continues to cause supply chain disruptions for companies.

In total, around £550 billion ($672 billion) of market value has been removed from the index tracking locally exposed stocks and bonds.

“It’s been a really tough year,” Anna McDonald, UK small-cap equity Edinburgh-based fund manager at Amati Global Investors, said by phone. “Valuations are showing a much worse picture.”

Here are the details of what happened in UK markets this year:

London de-throne

This was also the year Britain lost its crown as Europe’s largest stock market. The combined market capitalization of primary listings in Paris – excluding ETFs and ADRs – was $2.97 trillion as of December 15, compared with $2.95 trillion in London, according to data compiled by Bloomberg.

And it wasn’t only France that toppled London: India and Saudi Arabia toppled Britain as well. Saudi Arabian shares gained this year as Brent crude rose to a peak of around $140. The Saudi Arabian Oil Company, also known as Saudi Aramco, comprises more than half the market capitalization of the exchange and is the world’s third largest.

Indian firms have benefited from access to cheap Russian crude, according to Nick Payne, investment manager in emerging market equities at Jupiter Asset Management.

Turbulent year for the pound

UK markets experienced high volatility in late September as then Prime Minister Liz Truss and Chancellor of the Exchequer Kwasi Kwarteng announced unfunded tax cuts in their so-called mini budget.

The announcement rattled markets as investors raised concerns about the increase in government borrowing that would be needed to finance the policies. The pound fell to an all-time low of 1.0350 against the dollar and, despite rebounding after Rishi Sunak replaced Truce as prime minister, is still set for its biggest annual decline since 2016 .

“The image of the UK has been tarnished by Brexit, political turmoil and the events seen in September,” said Chris Iggo, chief investment officer at AXA Investment Managers’ core unit.

Gilt Yields Spike

Britain’s benchmark 10-year yield has risen more than two percentage points this year, the most since 1994. That’s because the Bank of England raised interest rates at the fastest pace in more than three decades to prevent double-digit inflation.

Strategists at BlackRock Inc said in their 2023 outlook that while returns have moderated since the mini-budget, “perceptions of fiscal credibility have not fully recovered.”

corporate debt drought

Many sterling bond sales were stalled through this year’s various bouts of volatility, including no deals in the two weeks following the mini-budget and the ensuing liability-driven investment (LDI) crisis, for which BOE intervention was required.

Outflows of around £115 billion, including gilts, fell to their lowest level since 2018, at a time when investors fear Britain’s struggles to secure a Brexit deal.

ftse 100 moment

The more international FTSE 100 stood out as a bright spot, meanwhile, following a poor performance since Britain voted to leave the European Union in 2016, partly due to a lack of “growth stocks” in sectors such as technology.

The weaker pound benefited exporters, while a jump in commodity prices extended gains for the likes of Glencore Plc and Shell Plc. Non-cyclical sectors such as staple goods and healthcare further strengthened the FTSE, as investors sought shelter during economic downturns.

The FTSE 100 is the best performing major developed market this year in local-currency terms, down 11% in the US dollar, and is poised for its biggest performance against euro-zone peers since 2011.

home stock doom

UK stocks’ outperformance has been limited to bluechips. 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 UK economy, rising interest rates and the aftermath of Brexit have affected sectors such as homebuilding, banking, real estate investment and retail.

Still, the dynamic for UK stocks could change next year, according to Susana Cruz, a strategist at Liberum Capital Ltd.

Shrinking IPO Shares

It is not just on market value that London is losing ground. While it was a bad year for IPOs globally, the UK’s share of capital from European initial public offerings fell to its lowest since 2009. According to data compiled by Bloomberg, listings in London have raised just £1.5 billion this year, 9% of the European total.

London hasn’t had an IPO worth over a billion dollars this year, and only five deals have raised more than $100 million.

(Except for the headline, this story has not been edited by NDTV staff and is published from a syndicated feed.)