Cheap and not particularly nasty.
Recession fears are hanging over the UK again. How do you feel about the idea of using “Britcoin,” the nickname for a potential digital currency backed by the Bank of England? Underwhelmed? Confused? Concerned about the privacy aspects? You’re not the only ones! In a bonus edition of Merryn Talks Money, she and I talk to Bloomberg’s excellent crypto reporter Emily Nicolle about her recent conversation with Tom Mutton, who’s heading up the project at the Bank.
Here’s a striking statistic, highlighted by my colleagues over on the UK Markets Today blog. The FTSE 250 index — which is much more oriented towards domestic stocks than the FTSE 100 — has fallen for 10 days in a row. If it closes lower today as well, that’ll be the first such losing run since 1998. And it’s never had a 12-day losing streak.
There is, of course, a first time for everything, so this isn’t me suggesting that you run out and put a bet on the FTSE 250 going up tomorrow if it does indeed close lower today. But it did make me want to take a closer look at what’s been going on. And I think, when you look at price action so far this year, it’s pretty clear.
Take a look at the chart above. The white line is the FTSE 250. The dark blue line is the yield on the five-year UK gilt (government bond), which you can think of (in this example) as a very rough approximation for where markets think interest rates are heading. (I could’ve used the two or 10-year gilt and they’d have made the same point). The vertical white line shows that the FTSE 250 topped out on the same day that the five-year gilt yield hit the lowest level it had seen since the mini-budget / overleveraged pension funds panic. In other words, the FTSE 250 hit a high when interest rates hit a low.
The red line shows that the current run of misery started when the UK’s most recent jobs data showed that wage inflation was in fact accelerating. Things have only deteriorated as this acceleration got reflected in core inflation data released last week.
The implication, I feel, is pretty clear. UK domestic stocks are struggling because markets reckon the Bank of England will now have no choice but to push the economy into recession.
Recession Fears Are Back
Let’s take a slightly deeper delve. I took a look at which sectors have been hit hardest over the last fortnight, and which have been most resilient. It’s very clear what’s driving the fall: anything with a hint of interest rate sensitivity and recession vulnerability (which are pretty well correlated in any case). It’s what you’d expect.
So, for example, the hardest-hit sector in the FTSE 350 (I’m using the 350 now rather than the 250 for ease of accessing the data but it’s representative) is the housebuilders. Every one of them has dropped since June 13, with declines of at least 10% for all but Berkeley Group Holdings Plc.
The next-hardest-hit sector is the real estate investment trusts, again for obvious reasons. Higher interest rates make debt more expensive to service, reduce the value of the buildings they own, and increase the risk of a recession that makes their rental income less secure.
Other notable fallers include estate agencies, as well as other companies exposed to cyclicality — engineering stocks, for example.
As for risers? At the time of writing (because I ran the report up to the current trading session, which is still in action), we’ve only seen about 40 stocks out of 350 go up since the June 13 session, and just 20 out of the FTSE 250.
In short, it’s been a pretty grim 10 days of trading. We’re not quite back at the panic-stricken lows of October last year, but we’re not that far off them.
Should you care? Honestly, I don’t think so. You’re not a daytrader (if you are, you’re in the wrong place). You’re a long-term investor. Over the long run, if you buy assets when they’re cheap, then you should make a better return than if you buy when they’re expensive.
So if you’re looking for a long-term investment, which looks cheap now and should in the long run get less cheap and perhaps even expensive one day, then UK stocks still meet that particular criteria — particularly after the last 10 days.
Merryn’s latest podcast guest discussed this very topic, all with a focus on the UK and smaller stocks in particular.
If you prefer to read your podcasts rather than listen to them, the transcript for the latest Merryn Talks Money is out — Merryn speaks to fund manager Gervais Williams about why we might be near the start of a long bull market for UK equities.