What’s Fortifying The FTSE 100?

By Keith Skinner

The largest companies in the UK equity benchmark may stand to benefit from global economic shifts, including higher inflation, interest rates and capital spending.

In early November, fireworks and bonfires lit up the UK on Guy Fawkes Night—or “Bonfire Night”—to commemorate the Gunpowder Plot from 1605, when a group of assassins bungled the murder of King James I by failing to blow up the House of Lords. While recent events in the UK may not match the same life-or-death drama, the mini-budget released by the new Conservative leadership team did succeed in blowing up the UK government bond market, the British pound, and ultimately Liz Truss’s short spell as Prime Minister.

And yet, through all the turmoil, the UK equity market has shown considerable resilience. Despite swirling uncertainty around fiscal sustainability, stubborn inflation, the energy crisis and continuing labor market pressures, the FTSE 100 has been one of this year’s best-performing markets in local currency terms: As of October 28th, the FTSE 100 was down 4% year-to-date, while the S&P 500 has dropped 20%. So what gives?

The short answer, in our view, is that the UK equity market tends to take its cues from shifts in the global economy rather than from troubles at home.

First, while the FTSE 100 is frequently thought of as the UK’s premier equity index, that’s something of a misnomer. In fact, many FTSE 100 companies are multinationals that do little to no domestic business, and as much as 80% of their total sales are made outside of the UK. Listing on the FTSE may well be more a matter of convenience: If you’re a company operating in one of the eight time zones between the UK and Singapore, a London listing could be helpful when raising capital.

Consider, too, that despite its recent performance, the UK equity market has lagged other global equity markets since the Global Financial Crisis. A cursory top-down view might blame the Brexit vote and its potential impacts on the UK economy; the reality, however, is that many of the largest companies in the benchmark—which hail from sectors such as energy, materials and financials—were not the chief beneficiaries of the goldilocks era of low inflation and ultra-low rates.

Moving forward, we believe geopolitical changes will drive broader economic shifts, including higher inflation, interest rates and capital spending. Those trends would seem to herald a brighter future for global companies in the real economy—and that’s potentially good news for UK equity investors.

This material is provided for informational purposes only and nothing herein constitutes investment, legal, accounting or tax advice. This material is general in nature and is not directed to any category of investors and should not be regarded as individualized, a recommendation, investment advice or a suggestion to engage in or refrain from any investment-related course of action. Investment decisions and the appropriateness of this material should be made based on an investor’s individual objectives and circumstances and in consultation with his or her advisors. Information is obtained from sources deemed reliable, but there is no representation or warranty as to its accuracy, completeness or reliability. All information is current as of the date of this material and is subject to change without notice. The firm, its employees and advisory accounts may hold positions of any companies discussed. Any views or opinions expressed may not reflect those of the firm as a whole. Neuberger Berman products and services may not be available in all jurisdictions or to all client types. This material may include estimates, outlooks, projections and other “forward-looking statements.” Due to a variety of factors, actual events or market behavior may differ significantly from any views expressed. This material is not intended as a formal research report and should not be relied upon as a basis for making an investment decision. The firm, its employees and advisory accounts may hold positions of any companies discussed. Specific securities identified and described do not represent all of the securities purchased, sold or recommended for advisory clients. It should not be assumed that any investments in securities, companies, sectors or markets identified and described were or will be profitable. Investing entails risks, including possible loss of principal. Investments in hedge funds and private equity are speculative and involve a higher degree of risk than more traditional investments. Investments in hedge funds and private equity are intended for sophisticated investors only. Indexes are unmanaged and are not available for direct investment. Past performance is no guarantee of future results. This material is being issued on a limited basis through various global subsidiaries and affiliates of Neuberger Berman Group LLC. Please visit www.nb.com/disclosure-global-communications for the specific entities and jurisdictional limitations and restrictions. The “Neuberger Berman” name and logo are registered service marks of Neuberger Berman Group LLC. © 2009-2022 Neuberger Berman Group LLC. All rights reserved.

Click to enlarge

Original Post

Editor’s Note: The summary bullets for this article were chosen by Seeking Alpha editors.