On 15 February last year, the FTSE 100 index hit a record high as it passed 8,000 points for the first time. However, the market has not reached that mark since, lagging at around 7,566 points a year later. Newton Investment Management’s head of UK equities David Cumming (pictured) contemplates the last 12 months for the index, the re-listing threat, and the state of UK equities as a whole in 2024.
Reflecting on the FTSE 100 breaking the 8,000 barrier, Cumming says: “If you go back to this time last year, bond yields were slightly lower and there was another inflationary surge. Some of the data wasn’t great at the start of the year inflation wise, and then we saw bond yields and industry expectations rise.”
After February, however, Cumming notes the index was hit by fluctuating commodity prices among other factors.
“The index is quite heavy on oil and mining and, at that point, some of the commodity prices came off, which seems to be among the reasons the market pulled back,” he says.
“Then if you go to the second half of the year, inflation started to fall more quickly, so one should hope that the pulse of negativity that hit us after February continues to unwind. But the UK market seems to have been reluctant to rally, even though I’d argue the economic data has been pretty good [so far in 2024].
“At the time, we had a strong run before bond yields and inflation hurt the market, and we haven’t quite got back yet. Personally, I think we will get back to that level this year at some point. There should be an explosion of performance in the UK at some point, because the market gap is just so wide.”
Re-listing threat
There has been concern in recent years over the threat of companies ditching the London Stock Exchange and re-listing in a more favourable environment.
2023 saw Irish building product manufacturer CRH switch its primary listing from London to New York, while Tui Group shareholders voted in favour of moving its listing to Frankfurt earlier this week.
Cumming thinks that evidently, de-listing damages the UK market and the threat is bigger today than ever before.
“We have to stem that tide. It’s not just about attracting small tech companies to list here, it is making sure we don’t lose companies too. The trouble is that the valuation gap persists, and companies say, ‘if we list in the US, we get a 20% kick to the share price’, ironically there is some truth in that.
“The UK has to try and solve that by making people realise that UK stocks are actually cheap and they should buy them, and by making sure that stocks are encouraged not to list elsewhere for what may be temporary reasons.”
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Bright spots
Cumming has managed UK equity strategies for over 35 years. In that time, he says he has never known such negative sentiment towards the region among investors.
“The market is very defeatist about the UK at the moment,” he said. “I do believe that people have realised that the UK market is under pressure and the government and regulators have to do something about it to promote ownership, and encourage regulation that attracts companies to list here, so there is a recognition that there is a problem which is a start.
“But it’s going to be difficult and I’m not sure whether this is a ‘darkest before the dawn’ moment. I definitely think the market is cheap. Whether there is a sudden burst of love for UK equities in general, it’s difficult to judge.”
Alongside Tim Lucas, Cumming co-manages the £1.5bn BNY Mellon UK Income fund, a top-quartile performer over three and five years in the IA UK Equity Income sector.
Painting a more positive picture for the UK market over the medium-to-long term, he says: “Our view of the world is still that growth is going to surprise on the upside. Our line in the debate is that there’s not going to be a landing. There might be a difference in altitude, but we’re not going into [a meaningful] recession anywhere for the moment.
“There’s no real political risk in the UK, in my view, because frankly the Labour and Conservative Party seem almost identical. Politics from a market perspective is of more interest outside the UK, mainly in the US this year.”
He adds: “Globally, as well as in Europe and the UK, we’re relatively positive. Consequently, we see a lot of value in industrials, financials, energy, and less value in defensive stocks. We’re underweight telecoms, utilities, and staples. If we find great stock ideas there, we would buy them, but the backdrop for those sectors is less exciting.
“For an income fund, we are more economically sensitive than average. We have more industrials, so we want the economy to grow and we want things to get better, rather than lose money more slowly in the market as things go down.”
