The year London lost its market crown to Europe

It’s been a dramatic year for UK markets.

The onset of recession, inflation at a 41-year high, the resignation of two prime ministers and Margaret Thatcher’s highest number of strikes in the 1980s fueled a sell-off in domestic stocks as well as government and corporate debt.

The plunge in multiple assets comes as Britain faces a potentially tougher cost-of-living crisis than other advanced economies. This is partly due to higher energy price thresholds for households, as well as shorter-term mortgage payments, which are more sensitive to central bank rate hikes. Meanwhile, Brexit continues to cause supply chain disruptions for companies.

In total, about 550 billion pounds ($672 billion) of market value was shaved off indices tracking locally exposed stocks and bonds.

“It’s been a really tough year,” Anna McDonald, fund manager of U.K. small-cap stocks at Amati Global Investors in Edinburgh, said by phone. “The evaluations reflect a rather bad picture.”

Here’s what happened in UK markets this year.

Dethroned in London

This was the year the UK lost its crown as Europe’s largest stock market. The combined market capitalization of primary listings in Paris, excluding ETFs and ADRs, was $2.97 trillion as of Dec. 15, compared with $2.95 trillion in London, according to data compiled by Bloomberg.

And it was not only France that overthrew London. India and Saudi Arabia also moved ahead of the UK. Saudi Arabian stocks have gained this year as Brent crude has peaked around $140. Saudi Arabian Oil Co., also known as Saudi Aramco, accounts for more than half of the stock market’s market capitalization and is the world’s third-largest company.

Indian companies have benefited from access to cheaper Russian oil, according to Nick Payne, investment manager for emerging markets equities at Jupiter Asset Management.

Pound’s turbulent year

UK markets experienced bouts of high volatility in late September when then Prime Minister Liz Truss and Chancellor of the Exchequer Kwasi Kwarteng announced unfunded tax cuts in their so-called mini budget.

The announcement jolted markets as investors worried about increased government borrowing that would be needed to finance the policy. The pound fell to an all-time low of $1.0350 against the dollar and, although it recovered later as Rishi Sunak replaced Truss as prime minister, is still poised for its biggest annual decline since 2016.

“The UK’s image has been damaged by Brexit, political turmoil and the episode we saw in September,” said Chris Iggo, chief investment officer at AXA Investment Managers Core.

A gilded crop yields a spike

Britain’s benchmark 10-year yield has risen more than two percentage points this year, the most since 1994. It comes as the Bank of England raised interest rates at the fastest pace in more than three decades to tackle double-digit inflation.

And while yields have eased since the mini-budget, “perceptions of fiscal credibility have not fully recovered,” BlackRock Inc. strategists said in their 2023 outlook.

Corporate debt drought

Many sterling bond sales have been suspended by various bouts of volatility this year, with no deals in the two weeks since the mini-budget and the ensuing liability-based investment (LDI) crisis that required BOE intervention.

At around £115 billion, including gilts, issuance fell to the lowest level since 2018, at a time when investors were angered by Britain’s struggle to secure a Brexit deal.

The FTSE 100 moment

Meanwhile, the more international FTSE 100 stood out as a bright spot after the UK voted to leave the European Union in 2016, partly due to a lack of “growth stocks” in sectors such as technology.

A weak pound benefited exporters, while higher commodity prices provided a boost for companies such as Glencore Plc and Shell Plc. Non-cyclical sectors such as staples and healthcare further bolstered the FTSE as investors sought safe havens during the economic downturn.

The FTSE 100 is the best developed market this year in local currency terms, while it is down 11% in US dollar terms and is on course for its biggest outperformance against eurozone peers since 2011.

Internal stock Doom

UK stocks’ performance was limited by bluechips. The FTSE 250 mid-cap index and another benchmark that tracks domestic shares, the FTSE Local UK Index, both fell more than 20% year-on-year, the most since the 2008 global financial crisis. Worries about the UK economy, rising interest rates and the fallout from Brexit have hit sectors such as housing, banking, property investment and retail.

Still, the dynamics for UK stocks could change next year, according to Liberum Capital Ltd strategist Suzanne Cruz. He expects UK mid-caps to outperform large-caps as inflation eases and the dollar weakens.

Shortening of IPO Shares

It’s not just market value that London is losing ground. While it was a bad year for IPOs around the world, the UK equity share of proceeds from European initial public offerings fell to its lowest level since 2009. According to data compiled by Bloomberg, London listings have raised just £1.5 billion this year, which is 9% of the European total.

London has had no billion-dollar IPOs this year, and only five deals have raised more than $100 million.

(Except for the headline, this story was not edited by NDTV staff and was published from a syndicated feed.)