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Three reasons why British stocks are beating their American rivals

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London Stock Exchange - Toby Melville/REUTERS
London Stock Exchange - Toby Melville/REUTERS

Finally, after years as an embarrassing also-ran, the London stock market is enjoying, in relative terms at least, a moment in the sun. While the S&P 500 index, the best benchmark for Wall Street’s performance, has fallen by about 19pc so far this year, putting it within a whisker of official bear market territory, the FTSE 100 has risen – if only by about 1pc – since New Year’s Eve 2021.

Why? We can answer in three words: value, commodities and currencies.

The London and New York stock exchanges have become almost mirror images of each other. Wall Street’s gleaming tech success stories are almost entirely absent from the FTSE 100, whose upper reaches are instead full of “old economy” oil companies, miners and banks – “value” stocks in other words.

Over the past few months investors have fallen heavily out of love with growth stocks, of which technology companies are the most extreme example, and rediscovered the attractions of value. A good number of London’s value stocks are also commodity companies, some of which have benefited from the boost given to the price of many commodities, not least oil, by the war in Ukraine.

But commodities tend also to be priced in dollars and this has provided an additional boost to London-listed stocks because the dollar has strengthened considerably so far this year: $1 bought 74p on Dec 31 but now buys almost 80p. A very large proportion of the aggregate earnings of FTSE 100 companies comes from abroad so sterling’s loss is the stock market’s gain.

It is exactly what happened after the EU referendum in 2016 once the initial shock had worn off: investors realised that Britain’s leading companies had just become significantly more profitable thanks to their dollar earnings and marked their shares up accordingly.

Why has the dollar strengthened? In part it is because America’s central bank has raised interest rates several times and is expected to do more of the same but it’s also because in times of crisis and uncertainty investors see American assets as a safe haven.

The rise in the dollar will of course have partly offset the fall in American stocks for investors on this side of the Atlantic. This column believes that all investors should have exposure to foreign currencies via overseas stocks because holding assets denominated in a variety of currencies is a form of diversification, investors’ best friend in the battle to make the biggest gains with the lowest volatility.

Now seems an especially important time to own American stocks because Questor can see the pound weakening further still. Inflation has tended historically to peak at a higher level here than in America and we cannot rely on those flows of “safe haven” money in the way the US can.

There is the danger of a vicious circle in which a weakening pound boosts import prices and hence inflation, which puts further downward pressure on sterling – inflation (a loss of value against goods and services) and a fall in the exchange rate (a loss of value against other currencies) are really just two sides of the same coin.

To offer readers more scope for diversifying their portfolios into the dollar we intend for the next few months to devote our Wednesday column exclusively to American stocks, not least because the recent falls have made some valuations more reasonable. On some occasions we will be updating on shares we have already recommended, but we hope to offer you a range of potential new holdings. Our columns on Tuesdays and Sundays will continue to tip British stocks.

We’d like to hear what you think of this and also of any other ways in which you think the column could serve you better. Do get in touch via email or, if you belong to our WhatsApp group, by replying to one of our messages there. You are also welcome to write to us in the post. All contact details are in the box below.

Read the latest Questor column on telegraph.co.uk every Sunday, Tuesday, Wednesday, Thursday and Friday from 5am.

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