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13 April 2021

UK Markets Continue to Perform

Investment flows into UK equities have been on the rise as of late and did not slow down last Friday morning. At the time of writing, the FTSE 100 was up +2.4%, while the FTSE 250 posted record highs, gaining +2.36%. The performance of both has been strong over the last few months, and as the FTSE 100 is now approaching levels not seen since before the pandemic, and while the FTSE250 is at its highest point yet, the regular underperformance of UK indices against other major indices may soon be a weight lifted from the mind of UK investors.

A number of factors have driven inflows recently; the most obvious being a speedy vaccine rollout, which has positioned the UK for an economic re-opening sooner than most, enticing capital away from global markets with less favourable outlooks as a result. One that is less apparent and may have played a role in the outperformance these last few weeks is the sector composition of the UK market. It has previously been highlighted as “outdated” with the sector weighting for technology standing at 1.37% vs 17.71% for financials – quite backwards compared to global peers which has no doubt left the UK watching from afar as both the US and China experienced tech booms. However, the current market outlook of rising bond yields and changing inflation expectations over the next few years could see the FTSE’s composition work in its favour. Some analysts are predicting a rotation into healthcare, consumer stocks and financials as the market environment develops, considering these sectors make up the top three weightings for the index, the FTSE’s potential to outperform other global indices in these circumstances is much more optimistic.

It was another positive week for equities in the US last week, the S&P 500 was up +1.74% and the Nasdaq +3.48%, with little reaction to mixed economic data. Initial Jobless Claims were higher than expected, at 744,000 compared to estimates of 694,000, but continuing claims for unemployment insurance reached their lowest point since 21st March 2020. The data from two weeks ago hinted at signs of recovery in the labour market as unemployment fell to 6%, while non-farm payrolls – the number of workers in goods, construction, and manufacturing companies in the US – increased by 916,000.

Janet Yellen also proposed a solution after President Biden’s proposition for a corporate tax hike was met with disapproval over concerns it would limit the competitiveness of the United States amongst its global competitors. The master plan? To introduce a universal corporate tax rate that would allow the US to remain competitive while stopping a race to attract business investment with lower rates. Although seemingly a fair idea, the Head of the World Bank scrutinised this, stating that a minimum global tax rate for companies which is too high would damage the ability of poorer countries to attract new investments. No doubt this needs consideration, and when combining global corporate tax hikes with the potential carbon tariff that is to be set, the extent to which this hinders an environment for growth could be a significant issue for large companies and the countries they operate within.

While carbon tariffs are debated, Yorkshire-based Morrisons played their part in saving the environment last week. The supermarket chain vowed to remove all plastic carrier bags from its stores over the next year and will offer paper ‘bags-for-life’, making it the first UK supermarket to abolish them completely. The move is a significant step in combating the role of UK supermarkets in reducing plastics in the ocean and, according to Morrisons, almost 100 million plastic bags will be removed in total, saving 3,200 tonnes of plastic per year.
 
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UK Markets Continue to Perform
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