While the Covid-19 disease is first and foremost having a devastating effect on human life, we turn our attention to the effect it is having on stock markets and specifically, the UK equity market. Over the first three and a half months of this year, the UK equity market has fallen more than all other major developed and developing equity markets, such as the US, Europe, Japan, Asia, including the Chinese market itself, which has ironically held up relatively well this year.
Technology holding up well
The performance of each investment sector on a global scale paints a much clearer picture as to what is going on, with the areas proving most defensive being healthcare, utility and the technology sectors. Although healthcare and utility sectors have long been associated with providing robust returns during times of crisis, owing to people still getting sick and having to keep the lights on, the technology sector is bit of an anomaly under these circumstances. However, looking at the nature of what is going on in the world today, we are being told to work from home where possible and technology plays a key role within this. Well known technology company Microsoft, for example, is reporting material growth in cloud-based usage over the first quarter of this year simply owing to more people working from home. Those who are unable to work from home, or are simply stuck in the house during the evening, are binge-watching either The Crown or Tiger King on Netflix.
The sectors facing headwinds
Turning to what is not working well, the oil & gas sector has been hard hit this year. Crude oil prices have plunged from $60 a barrel to around $25, and we are seeing a slump in demand at the same time that a production war has started between the Saudis and Russia. The financial sector has also been hard hit. Those banks that make their money in a high rate environment are now at the mercy of central banks cutting rates. While the financial sector consists of a broad range of businesses outside of banks, they are generally geared to the markets in some way, shape or form and falling markets are generally not good news for financial companies.
What does this mean for the UK equity market?
This speaks to why the UK market is underperforming on the global stage. Those poorly performing financials and oil & gas areas are large components of the UK market. In fact, the financials industry accounts for nearly a quarter of the FTSE All Share, whereas the better performing utility and technology areas account for less than 5% of the FTSE All Share combined. To put this into context, compared to the US market, for example, those better performing technology and communications service areas account for 35% of the S&P 500, whereas the energy sector now only accounts for 2.5% of the S&P. Should these cyclical areas rebound from their lows, we would expect to see the UK market to perform better, but it is hard to make a compelling argument as to what would be the catalyst at this juncture other than that these stocks are trading on cheap valuations.
This update is only aimed at professional advisers and regulated firms and should not be passed on to or relied upon by any other persons. It is not intended for retail investors, who should obtain professional or specialist advice before taking, or refraining from, any action on the basis of this update, remembering past performance is not an indication of future performance.
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