U.K. Stocks Have Lost All Their 21st Century Gains

(Bloomberg) -- U.K. stock investors can wave goodbye to index gains of the last 18 years.

The FTSE 100 on Wednesday closed below the level seen at the end of 1999, and extended its declines on Thursday. The benchmark gauge today fell 3.2 percent, the worst drop since June 2016, matching the magnitude of the decline following the Brexit referendum on a closing basis.

The renewed sell-off in global equities is piling additional pressure on U.K. stocks, already rocked by concerns about U.K Prime Minister Theresa May's ability to get her Brexit deal through Parliament. The latest bout of market carnage is being blamed on renewed U.S.-China trade concerns, but its magnitude has surprised investors.

“Unfortunately, the current global sell-off, and investor nervousness, have coincided with a continued lack of visibility on Brexit, which has undoubtedly affected investor sentiment,” said Marcus Morris-Eyton, a portfolio manager at Allianz Global Investors. “This, combined with the unfavorable sector composition of the FTSE 100, is contributing to structural outflows out of the U.K. equity market."

Read More: European Stocks Hit Two-Year Low on Worst Day Since February

As recently as May this year, U.K. stocks reached a record high, fueled by the British pound's decline. To be fair, the gain in the FTSE 100 between the end of 1999 and this year's peak on May 22 is not much to brag about: about 14 percent, compared with a rally of about 86 percent for the S&P 500 Index.

But if you take dividends into account, the picture is much more cheerful. The FTSE 100 Total Return Index is up about 90 percent since the end of 1999.

“It's tempting to conclude the stock market has gone sideways,” Laith Khalaf, a senior analyst at Hargreaves Lansdown, said in a note. “That's because the headline FTSE 100 index ignores dividends paid by U.K. companies, which are a huge source of the total return payable to investors.”

Andrew Milligan, head of global strategy at Aberdeen Standard Investments, agrees that one should focus on the dividend returns as opposed to just index levels.

“An investor should look at the total return from investing in a stock market, taking account of dividends and share buybacks,” Milligan said by email. “Hence if someone invested in the U.K. stock market at the start of the millennium, they would have doubled their money.”

Britain's benchmark gauge today entered oversold territory, with the 14-day relative strength index closing at 30, at the level that to some analysts signals a security is due for a rebound. The last time the FTSE 100 Index's RSI closed below 30 was in October, and that was followed by a brief rebound.

“It's a combination of macro-economic worries that's weighing on U.K. shares,” said Andrew Koch, a fund manager at Legal & General Investment Management in London, pointing to trade war concerns, the impact of a weak oil price on energy stocks and Brexit worries.

“Next week's vote looks likely to reject May's deal and the path from there will be very uncertain,” Koch said. “Add a few profit warnings, and it's a nasty combination.”

--With assistance from Sunil Jagtiani.

To contact the reporter on this story: Ksenia Galouchko in London at kgalouchko1@bloomberg.net

To contact the editors responsible for this story: Blaise Robinson at brobinson58@bloomberg.net, John Viljoen

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