Interactive Investor

Can UK stocks stretch global winning streak to three months?

28th February 2022 08:03

Lee Wild from interactive investor

After years of underperforming international peers, the UK stock market is back in favour again, and our indices have beaten major Western rivals every month in 2022 so far.

Well, what a month. As winter draws to an end, thoughts usually turn to the joys of spring and new growth, better weather and, of course, the end of the tax year. But Russia’s invasion of Ukraine, met with widespread condemnation from the international community, has had a massive impact on financial markets. Volatility, I’m afraid, is here to stay for the foreseeable future.

Global stock markets, on edge for weeks amid a huge build-up of Russian military along its border with Ukraine, plunged 3% or more as Vladimir Putin ordered his tanks in. A day later, and those same markets are back up where they started, responding to new sanctions and news from both the Americans, other NATO leaders and the battle front.

With no sign of Putin backing down, little chance of NATO or the EU putting boots on the ground in Ukraine, and sanctions taking time to become effective, there seems little opportunity for a satisfactory humanitarian or economic solution.

Any escalation of hostilities, especially involvement of NATO or her allies, would increase the stakes significantly and cause problems for risk assets like equities.

And let’s not forget that stock markets were already in trouble before Ukraine. Rising inflation, higher interest rates and central bank policy have been affecting sentiment for months. Tech stocks have also had a terrible 2022 so far, upended by the prospect of higher borrowing costs putting the brakes on growth.

Markets in numbers

In January, the Nasdaq Composite tech index fell 9% and the broader S&P 500 more than 5%. A 1% gain for our own FTSE 100 put the blue-chip index in the top three performers at the beginning of 2022.

Despite everything that’s been thrown at it during February, the UK’s leading index is top of the international pile again this month. Admittedly, a 0.3% gain as at the close of business on Friday 25th would not normally be much to shout about, but the context is important here. 

The mighty S&P fell 2.9% in February, the Nasdaq lost another 3.8% and European markets in France and Germany slumped by 3.5% and 5.8%. Predictably, the Russian stock market, already down 10% in January, plunged a further 35% this month.

Interesting fact: the Nasdaq lost more points between its peak on 4 January at 15,852 and its low last Thursday – 3,265 points – than it did during the Covid crash (3,207 points). Of course, the astonishing rally since March 2020 means this market correction is much smaller in percentage terms – 20.6% versus 32.6% in 2020.

So, it seems the UK’s time has come. Many overseas markets have outperformed UK assets for months, if not years, largely since Brexit and the perceived political and economic risks that comes with it. The FTSE 100 also has a generous helping of so-called old economy stocks, sectors like banks, tobacco and oil. Their growth prospects are not nearly as sexy as dynamic tech stocks on Wall Street.

However, the cycle has turned, and those battered “ex-growth” sectors are flavour of the month again – the rotation from growth to value has been written about widely. Oil is a particularly strong beneficiary of geopolitical issues, with crude prices above $100 a barrel particularly good news for BP and Shell. 

Beware the Ides of March

Bad things can happen in March, ask Julius Caesar. But it’s not only historic Roman debt collection and religious observance that make this an inauspicious time. The omens clearly aren’t great for March 2022 either.

History gives the FTSE All-Share a 50:50 chance of generating a positive return in March. Since the year 2000, the broad UK index has ended the month higher on 11 occasions and in negative territory an equal number of times. 

Not great odds, and the prospect of a drawn-out conflict in Ukraine will not only test the mettle of civilians and politicians, but also the nerves of investors facing another period of extreme volatility.

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