Large-cap UK equities remain completely unloved as the FTSE 100 suffers another poor week. The FTSE 100 is considered a proxy for the currency, as during periods of weakness this provides a boost to all the overseas earners. This has proved something of a fallacy this year as the pound has fallen against the US dollar and the FTSE 100 is down over 5% year to date. The Stoxx fifty has had an even worse year down almost 6%. The underperformance of European equities against US ones continues. The MSCI all-world index is up marginally this year almost entirely due to the strength of the US equity markets. Chinese equities fell 20% this year at one point, the Dax is down as is the Nikkei 225.
Big cap UK equities are largely exposed to the global economy, which is expected to grow circa 4% this year, and benefit from a strong dollar, in theory, the FTSE 100 should have had a reasonable year. As well as this many UK large companies have dividend yields that look extremely attractive to the alternatives. The UK economy is performing no worse than was anticipated at the start of the year. Indeed, the latest services Purchasing Manager Survey reported a larger than forecast rise. The PMI composite index suggests the UK economy should grow in the third quarter in line with growth in the second quarter. Brexit is the main uncertainty and perhaps investors feel no need to decide on investing in the UK until they get more clarity.
Europe has faced several difficulties this year, despite that, the economy and earnings are growing. Greece came out of the IMF bailouts this year, however, the existence of the euro continues to provide friction within the European economy. This time as Italy looks to introduce measures to boost its own economy that could put them in conflict with the rest of the European partners. On top of that Donald Trump’s escalation of trade, wars have created further uncertainty, along with concerns over Turkey.
US equities, in contrast, have largely ignored any potential banana skins, particularly rising interest rates, the strengthening dollar, leading to emerging market weakness. Investors continue to focus on a strong economy and the benefits of the fiscal stimulus earlier in the year.
Looking to the week ahead, on Thursday the Bank of England announce the latest interest rate decision, expectations are that the Bank will keep rates where they are. We also get UK GDP month on month for July on Monday, along with Industrial and manufacturing data for July. The ECB also meet on Thursday, as with the Bank of England no change is expected to interest rates.
As always there is a range of economic data from the US economy. The most important of which will be inflation, industrial production and the Michigan consumer sentiment