Yahoo Finance The UK stock rally has legs this time as buybacks and M&A surge
(Bloomberg) — After several false starts, the rally in UK stocks has room to run.
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The FTSE 100’s jump of about 5% in dollar terms in the past month is more than double the gains for Europe’s Stoxx 50 and the S&P 500 in the US, but there’s little to suggest it’s about to fizzle.
Energy companies and miners have an outsize presence in the British benchmark and climbing commodity prices as well as a spate of buybacks have helped lift their shares. Pound weakness has made the nation’s exports more competitive, while the economy has bounced back from recession.
“We think FTSE 100 has more to go,” Goldman Sachs Group Inc. strategists including Sharon Bell wrote in a note to clients. All UK sectors are at a deeper-than-normal discount to US peers, while commodity companies and banks have announced “exceptional” levels of dividends and buybacks, they said.
It potentially heralds a change in fortunes for a market that’s been a long-term underperformer.
Oil giants Shell Plc and BP Plc are targeting more than $5 billion of buybacks between them. Lenders HSBC Holdings Plc and Standard Chartered Plc have recently unveiled programs of their own.
On top of that, a flurry of corporate tie-ups and a more dovish tone from the Bank of England are buoying appetite for smaller, domestically-geared stocks.
M&A activity on UK-listed stocks is buoyant this year, with $101.3 billion of takeover approaches, according to data compiled by Bloomberg. That’s about 65% of the total M&A activity in Europe. The only thing missing are IPOs.
Still, there are warning signs. According to the Relative Strength Index — a technical indicator of whether a market has risen or fallen too much, too fast — the FTSE 100 hasn’t been this overbought since May 2018. That’s true for the FTSE 350, while the FTSE 250 is fast-approaching that level too.
Here’s a look at the state of play in the UK equity markets in five charts:
Outperformance
UK stocks have long been labeled cheap, but the discount has narrowed of late, partly thanks to strength in commodities prices and the dollar. Predictions of higher-for longer US interest rates also favor so-called value stocks.
Domestic Earnings
The optimism isn’t just around the biggest companies. Analysts expect better earnings growth for the smaller FTSE 250 firms than for those on the FTSE 100 as the economy recovers.
Data Signal
Last week’s data showing a quarterly rise in gross domestic product is a good sign for domestic-focused equities. It adds to figures from the Purchasing Managers Index survey that suggest the British economy continues to expand.
Door’s Open
The more domestic-focused FTSE 250 has underperformed in recent years as the UK economy wavered. However, Bank of England Governor Andrew Bailey has indicated markets were underpricing the pace of easing in the months ahead. Rate cuts could drive fresh gains for midcaps as domestic spending rebounds.
Too Hot?
These days, there aren’t many major markets out there with signs their gains may have gone too far, but the UK is one. The FTSE 350 is at its most-overbought level for six years, while the FTSE 250 is also approaching that level.
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