When I view the FTSE 100 index, I wonder why it keeps struggling to gain traction. The Footsie is up almost a fifth (19.2%) over one year. But that was a rebound from steep falls seen during 2020’s Covid-19 crisis. It’s also 11 percentage points behind the US S&P 500 index’s gain of 30.2%. And UK shares seem to be losing momentum as 2021 unwinds. What’s going on? Why does the UK stock market have trouble climbing?
The UK stock market’s slowdown
After a euphoric rush following ‘Vaccine Monday’ (7 November 2020), the UK stock market has slowed recently. Over six months, the FTSE 100 has gained a modest 4.4%. Over one month, it’s down 1.3%. And it has crept up 0.7% over the past five days. But when I view the chart, I see that the Footsie has also marked time since mid-June. It’s actually lost almost 160 points (-2.2%) since 16 June. Is this the usual summer slump? Are other factors affecting the market’s performance? I have three suggestions.
1. No gains since 1999 isn’t ideal
Global investors will have noticed that the UK stock market (in the form of the FTSE 100) has gone nowhere this century. At the end of 1999, the Footsie closed at a then-record high of 6,930.2 points. On Tuesday, it closed at 7,028.10 — a gain of 97.9 points (+1.4%) in almost 22 years. That’s a measly return of 0.06% a year (excluding dividends). Even adding in dividends still leaves this return below 3.5% a year. That’s scant reward for over two decades of risking money in London-listed shares.
However, the UK stock market isn’t just the FTSE 100 index. We also have the mid-cap FTSE 250 index and the wider FTSE All-Share index. These have both outperformed the Footsie since 1999. At end-1999, the FTSE 250 closed at 6444.9 points. On Tuesday, it closed at 23,129.10. That’s a solid gain of 16684.2 points (+258.9%) over almost 22 years. So the mid-cap index has absolutely thrashed the lagging blue-chip index. Likewise, the FTSE All-Share index closed out 1999 at 3,242.06 points. On Tuesday, it closed at 4,035.41, adding 793.35 points (+24.5%) this century. So it’s really the FTSE 100 that’s done terribly, rather than the entire UK stock market.Â
2. Did Brexit scare off investors?
Here’s another thing: the UK stock market (or the FTSE 100, at least) has gone nowhere for the past five years. It has gained under 130 points (+1.9%) over 60 months. Over the same timescale, the S&P 500 has more than doubled (+101.3%). Perhaps investors were deterred from investing in London stocks after the UK’s narrow vote to leave the European Union on 23 June 2016? Given the political and economic problems that have arisen since then, this could well be a factor in the FTSE 100 being a global laggard.
3. UK stock market: too much value, not enough growth?
With the FTSE 100 trading about 875 points (-11.1%) below its record high, I think the UK stock market is attractively priced. Indeed, it’s far cheaper than most major stock markets. And the Footsie’s prospective dividend yield of 3.8% for 2021 is a welcome source of passive income for me. But global investors may think otherwise. For many, the Footsie is dominated by old-economy value stocks, such as shares in the oil & gas, banking, mining, tobacco, and utility sectors. Clearly, there is a real lack of growth and tech stocks in the FTSE 100.
But, for me, these boring stocks offer deep value. In a world blowing asset bubbles everywhere, I keep buying cheap UK shares!