The ‘Boris bounce’ has landed like an elephant on a broken trampoline

    5 March 2020

    It’s been dubbed the ‘Boris Bounce’: from the day after the election to the peak in mid-January, the FTSE 100 index rose 6.5 per cent. Investors appeared to greet with enthusiasm the election of a pro-business party that had promised to ‘get Brexit done’. This narrative may please No. 10, but closer inspection reveals that even before the coronavirus took the bottom out of the market, the Boris Bounce had landed like an elephant on a broken trampoline.

    The first thing to say is that it wasn’t just the UK stock market that went up. Over the same period (from 11 December to 17 January) the S&P 500 rose 6 per cent and the MSCI Europe (ex UK) index of large European companies was up 4.5 per cent. The bounce had less to do with Boris Johnson getting a majority, and more to do with a wider global shares rally. And the Boris Bounce didn’t last. By mid-February, the FTSE 100 had lost most of its post-election gains whilst US and European stock markets continued to rise.

    So what’s been going on? The FTSE 250 is a better gauge of the strength of the UK economy as it includes smaller, more domestic firms. It also rose 6 per cent from 11 December to 17 January, but unlike the multinational FTSE 100, the FTSE 250 pretty much held onto those gains until the corona plunge. This is because after the election the UK economy is thought to have strengthened.

    Last summer was the weakest point in UK GDP for many years, with the economy actually contracting in the second quarter from April to June. However, GDP rebounded in the third quarter of 2019 and stabilised during the final three months of the year. This can be seen looking at the performance of the sectors. The FTSE 350 general retailers’ index is up over 20 per cent since the weak point between June and mid-February and the FTSE 350 construction and building materials index was up almost 25 per cent.Both are highly economically sensitive sectors.

    The Boris Bounce has landed like an elephant on a broken trampoline

    Markets always tend to over-react and there is no reason to think coronavirus will be any different. Assuming we don’t reach the worst-case scenarios, how strongly could the UK market rebound? We have not had GDP figures for January yet — i.e. for after the election — but other indicators show that things are stirring in the real economy. The CBI’s business confidence index for the first quarter of 2020 rose to its highest level since 2014. The manufacturing Purchasing Managers’ Index (PMI) for January — which tends to lead GDP figures — has rebounded with the strongest reading since last April. Then there is the Consumer Confidence Index published by German research group GFK. Though still negative, the January figure was the strongest reading since September 2018.

    The question is how deeply will coronavirus impact on GDP. Economists have been downgrading world growth forecasts already and the UK, as an open trading nation, is not immune.

    All markets fell after the virus came to public attention around 20 January, but while European and US stock markets rebounded to reach new highs in the middle of February, the FTSE 100 did  not.

    Why? Because EU risk is back on the table. Brexit may have been done, but the long-term trade agreement has yet to be negotiated. It could be a bumpy ride.

    Asad Zangana, senior European economist and strategist at Schroders, argues against looking at the FTSE 100: ‘A better indicator for the prospects for the UK economy is the pound. And just after the general election the pound got to $1.35, but the rally didn’t last long. By the Monday after, it fell as soon as the new Prime Minister set out his negotiating strategy for Brexit which reintroduced the risk of no deal.’

    Another year of political uncertainty over Brexit is capping investors’ desire to put money into the UK. Mr Zangana also points out that the global stock market rally after the general election was mainly due to Washington and Beijing concluding part one of their trade dispute. The agreement was announced on 13 December, the day after the UK election. It was lucky timing for Prime Minister Johnson. It wasn’t really a Boris Bounce at all, but a Trump/Jinping global rally.

    However, the UK stock market is still, as one broker puts it, ‘too cheap to ignore’. Between the referendum in June 2016 and the start of this year, the US S&P500 was up 65 per cent, Italy’s MIB up 60 per cent, the French CAC 40 up 48 per cent and the German DAX up 44 per cent.

    And the UK’s FTSE 100? Up just 21 per cent in over three-and-a-half years. While other markets having been bouncing — or rather, were bouncing — ours has been sagging. Never mind a Boris Bounce, we’re still in a Theresa Trough.