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One of the stock market’s long-time underperformers is on a tear. While most major indexes are backtracking amid concern over the impact of monetary tightening, Britain’s FTSE 100 Index just hit a two-year peak.
The UK benchmark has gained more than 3 percent in 2022, boosted by its high exposure to cheaper, so-called value stocks that investors have been shifting toward in preference to more expensive growth sectors.
The gauge rose 0,8 percent to 7 631 points in early trading Tuesday, its highest since January 24, 2020.
The FTSE 100’s year-to-date gains contrast with a 3,8 percent drop in the Euro Stoxx 50 index and a 5,9 percent decline for the S&P 500.
In addition to its heavy makeup of cheaper equities, the UK index has also been lifted by oil rallying to a seven-year high, spurring gains for the likes of Shell Plc and BP Plc. The latter edged higher Tuesday after full-year earnings.
The benchmark also benefits from being rich in bank stocks such as Barclays Plc and Lloyds Banking Group Plc, which are benefiting from the likely boost to profit margins of Bank of England interest-rate hikes.
Still, for some, the FTSE 100’s rally versus peers can only go so far. “We think the UK’s recent outperformance has run its course,” HSBC strategists including Max Kettner wrote in a note to clients Monday.
Underscoring the risk of an abrupt shift in monetary policy, borrowing costs for most-indebted European governments, including Greece and Italy, have surged since the hawkish pivot of the ECB last week.
The moves in government bonds are spilling over into corporate credit. Funding costs for euro high-grade borrowers have jumped above 1 percent for the first time since June 2020.
But JPMorgan’s strategists said a shift away from negative yields and negative policy rates could actually create a “tailwind” for major economies, as “the previous unintended consequences from negative rates abate.”
Negative rates have led to mis-llocation of capital, lowered bank profitability, clogged credit creation, and impaired functioning of money markets, the strategists said. –Bloomberg
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