The UK stock market: not damaged goods

 If, like me, you believe there are reasons to be cheerful about the outlook for the UK economy, what are the implications of an improving, growing economy for the UK stock market and its constituents, and what has caused the UK stock market to lag other developed economy markets so badly over the last ten years?

This is not the product of inferior economic performance from the UK. Over the last ten years, UK growth has lagged the US but matched Germany and exceeded growth in Italy and France. The UK’s inflation performance has also been comparable with that of its economic peers.

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Neither is this underperformance, with the FTSE up just 20%, the result of a correction of historic overvaluation, nor the product of poor underlying corporate performance. Quite the contrary, in aggregate, UK earnings grew by 67% from 2014 to 2023 despite the headwinds of the pandemic and the energy price crisis following Russia’s invasion of Ukraine.

Some commentators argue that sterling weakness has played a part in this underperformance. While it is true that sterling has depreciated over these ten years against the US dollar and the Euro, it has been broadly stable against these major currencies for over seven years. I find it very hard to believe that this is an explanatory factor. Indeed, most constituents of the FTSE 100 are global businesses that earn most of their revenues and profits in international currencies, which in large part negates the influence of depreciating reporting currency.

Which begs the question, why has the UK equity market been such a poor performer? Why has it been de-rated over this period, and what should we expect from UK equities in the future?

I think it is clear, and I hope you agree from the evidence I have presented here and in previous articles, that this profound underperformance is not the product of a persistent UK economic malaise. Commentators who regularly blame the economy for the poor performance of the UK stock market are pointing at the wrong culprit.

The reality, I believe, is that the seeds of the UK stock market’s underperformance and its broader problems were sown a long time ago by a series of damaging regulatory reforms that have progressively undermined the structure and purpose of the UK stock market.

These were then compounded by other political events which were more damaging than they should have been, principally because what had preceded them left the UK market more vulnerable than it would otherwise have been.

I will write a separate blog on this topic on Tuesday, but in conclusion for today, I should add with respect to the future performance of the UK stock market, that I believe it is poised to end this long-run period of underperformance and will deliver better returns in the future than we have seen over the last twenty or more years despite the many challenges it still confronts. As always, I will provide you with the data to support this assertion.

Answering your questions

Thank you to all of the subscribers who have sent in a question or a topic so far. I'll be answering them either in blog posts here or in shorter clips on Instagram and X. Keith F was one of the first to ask a question – here's my answer. Make sure you're following on Instagram to get the answers and, if you have a question or topic request, subscribe and let me know!