Investment Idea

Will Britannia rule again?

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27/10/2022 | 2 min read
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The UK stock market may catch up to FX tailwinds and sector exposure.

Equity markets seem to have bottomed mid-October and are set for a positive start to Q4 2022. The rise in interest rates and the US dollar rally has stalled at least temporarily. This has contributed to relief for interest-rate-sensitive stocks. Although profit growth is slowing, the Q3 2022 earnings season has also defied some fears of a rapid slowdown. However, according to FactSet, even as the percentage of companies of the S&P500 beating revenue estimates (70 per cent) are higher than usual, the Earnings per Share (EPS) beat of around two per cent is below the average of almost nine per cent, implying some margin disappointments.

For US companies, the FX headwind is a factor. In this environment, we see diversification to equity markets outside the US as a promising strategy.

The UK has had its fair share of political turbulence in recent months, but that may abate now following the appointment of Rishi Sunak as the New UK Prime minister. We believe the FTSE100 offers good diversification, with high exposure to, e.g., Energy, Financials and Consumer staples. Almost 70 per cent of revenues are generated overseas, and the weak British pound is a tailwind for revenue growth. The technology sector is only a tiny proportion of the index, which could be a relative advantage when the tech giants report disappointing results.

 Index weight comparison by sector between FTSE and S&P500

Source: Global Investment Strategy (GIS) as of 29 June 2022.

Although FTSE100 is a relative winner year-to-date, it has lagged other equity markets in the last month.

Stock indices performance on October 25, 2022, (one month)

Source: S&P Capital IQ. FTSE 100 Index in GBP, S&P 500 in USD, OMX 30 Index in SEK.

From a technical perspective, the index had bounced off the weekly 200 MA, which we see as a critical support level.

FTSE (in GBP), a weekly five-year price chart

Source: Infront and Carlsquare. Note: Past performance is not a reliable indicator of future results.

FTSE (in GBP), a daily one-year price chart

Source: Infront and Carlsquare. Note: Past performance is not a reliable indicator of future results.

The full name for abbreviations used in the previous text:
EMA 9: 9-day exponential moving average
Fibonacci: There are several Fibonacci lines used in technical analysis. Fibonacci numbers are a sequence of numbers in which each successive number is the sum of the two previous numbers.
MA20: 20-day moving average
MA50: 50-day moving average
MA100: 100-day moving average
MA200: 200-day moving average
MACD: Moving average convergence divergence


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