Remember the ‘Boris bounce’? A year ago investors were wallowing in the Conservatives’ 80 seat majority at the general election. Brexit, finally, appeared to be settled, the threat of a Corbynite raid on the economy over. UK markets briefly seemed attractive again. Then came the New Year – and Covid 19. No stock markets survived the initial plunge as economies were put in suspension. Yet when they bounced again from late March onwards the UK market was left behind like a burst beach ball. The FTSE 100 is still down for the year by 13.2 per cent, while the DAX is up by 3.6 per cent, the S&P500 by 15.3 per cent and the Nikkei enjoying a less-mentioned boom of 15.7 per cent.
Look at those figures in isolation and you would think that Covid-19 was a purely British disease, which had ravaged London, threatened to spread to the Continent without having yet done so and left the rest of the world untouched. True, at one stage in the spring, Britain was suffering especially badly, but it is no longer possible to say that now. If the FTSE has underperformed this year it has to be down to something else. The domination of the FTSE100 by oil shares hasn’t helped, but there is far more obvious reason: it dawned on investors that Brexit wasn’t really sorted out at the end of 2019 at all. The idea that a UK-EU trade deal would be a formality turned out to be somewhat wide of the mark. We spent much of the latter half of this year facing a ‘no deal’ exit, this time from the transitional arrangements. There is nothing markets like less than uncertainty.
With a deal now done, markets have enjoyed a Boris Bounce mark 2 this week – in spite of a surge in Covid infections and the growing likelihood of a third national lockdown. Markets are well and truly in relief mode – not to mention their being drunk on quantitative easing. There is great optimism that 2021 will be the year when the FTSE100 finally recovers its lost ground. Perhaps, but then again perhaps not. Trouble is that the FTSE 100’s problems go back far further than the past year, and far further back than Brexit. It has been a serial under-performer all century. Since 2000 the Nikkei is up 20 per cent, the DAX has doubled and the S&P 500 is up fivefold. The FTSE 100, by contrast, is still lower than it was on the last day of last century. It has failed to provide a positive return over 20 years – quite a feat.
Yet you would have to be an unfortunate investor in UK markets to have done as badly as the FTSE100 over the past two decades (although you could have achieved it easily enough by the simple expedient of buying a FTSE100 tracker fund). The FTSE 250 has trebled in that timeframe. Over the past year, the FTSE250 is down, but only by around seven per cent, half its bigger cousin’s fall. The FTSE100 has been dragged down over the years partly as a result of being dominated by some sectors which have done especially poorly in recent years, such as oil, partly thanks to the lack of big UK technology companies, and partly due to how it is put together. It is constantly picking up over-valued FTSE250 companies, waiting for them to plunge and then discarding them. The popularity of tracker funds is part of the problem: if a share is scooped up by the FTSE tracker funds will have to buy it whether they like it or not.
UK markets have certainly suffered from the uncertainty of Brexit. Now the future of Britain’s relationship with the EU has been largely sorted, they ought to do better – although there are bound to be hiccups along the way. The proof of the pudding will be when the UK government dares to change a regulation or two. Will the EU rush to impose tariffs, as the agreement allows if Britain adopts what can be deemed to be lower regulatory standards? Or will it prove tolerant, so long as the UK government doesn’t legislate, say, to allow small boys to be sent up chimneys?
But there is a parallel lesson: don’t use the FTSE100 to judge the performance of the UK markets, still less the UK economy. It is a dog of a stock market index. Brexit or no Brexit, there is no reason not to invest in UK shares. But just don’t buy a FTSE100 tracker.