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Summary
January saw UK markets decisively rebound from December’s indiscriminate selling, propelled by investors taking a more constructive view on Brexit and the US Federal Reserve signaling easier monetary policy in 2019. The UK top 100 companies ended January up 3.63%, while the UK top 250 and AIM gained 7.09% and 7.12% respectively.
At the sectoral level, UK equities posted broad-based gains, though both the Pharmaceutical and Telecoms sectors posted negative returns on the month. Sectors that are particularly sensitive to Brexit news flow, such as Retailer and REITs, did particularly well, with the latter posting the largest one-month gain in more than a decade.
UK economic data over the course of January continued to disappoint, though not to the extent registered in November and December. The perception of a lower probability of a ‘hard Brexit’ helped sterling to a sizable monthly gain, though markets now appear to be pricing in a lower probability of interest rate increases from the Bank of England, despite elevated inflation expectations over the medium term.
UK equity issuance in January still appeared to be impacted by December markets’ major fallout, with weak momentum evidenced. Issuance was up over 20% on a month-on-month basis, but was down by nearly three-quarters year-on-year. The sparse deal-sheet was notable by the presence of REIT offers.
UK Equity Markets
UK markets fully participated in January’s global rebound in risk markets as investors took a more measured view of the ongoing economic slowdown and the US Federal Reserve signaled easier monetary policy in 2019. During the course of the month a series of UK parliamentary votes took place that many interpreted as reducing the risk of a ‘hard’ Brexit. This boosted sterling and helped shape equity market performance.
At the sectoral level, market re-risking helped most to a monthly gain although a few managed to buck the positive trend. Most notable among the under-performers was the Telecomms sector, which compounded its December decline with a 6.83% fall in January. Investors remain far from convinced on returns as the 5G capex cycle ramps up. Equally, the ‘defensive growth’ qualities of the Pharmaceutical sector were out of favour, with a decline of 3.06%.
In contrast, the domestically-exposed Real Estate Investment Trust (REIT) sector posted the biggest monthly return in over a decade (+9.67%) in January, benefitting from a combination of stronger sterling, a flatter yield curve and improved sentiment. The Retail sector however, took pole position, having borne the brunt of December’s declines and been a notable under-performer in 2018. The sector ended January up 18.62%
Thematically, Travel & Leisure might have been expected to have also been one of the leading sectors, though some high profile earnings disappointments held the sector to just a 3.82% monthly gain. The Food & Beverage sector fared better, up 5.24%.
The relative performance of the large ‘sterling hedge’ sectors – Oil & Gas and Mining – was notable in January. While the former was limited by a stronger pound to just a 3.02% gain, despite a sharp rebound in crude, Mining managed a gain of 9.34%, in the absence of a major move in underlying metals prices.
UK Economy
Economic data received in January disappointed again, though not to the extent registered in December. Purchasing Managers Indices (PMIs) for both Manufacturing and Services came in ahead of expectations, though the latter from a low level, while the Construction PMI was largely in line. However, retail, housing and car registration data all appeared weak and consumer confidence remains depressed. The UK job market continues to be buoyant, and remains a key support for UK households.
On the inflation front, most measures came in below expectations and it is likely that headline CPI will dip below the Bank of England’s (BoE’s) 2% target in the months ahead. Notwithstanding this, wage inflation continues to exceed expectations and is currently running at the highest level in over ten years.
Overall, the combination of hard and survey-based UK economic data is consistent with real GDP growth of 0.2% in both Q4 2018 and Q1 2019, against the BoE’s forecast of 0.3% and 0.4% growth respectively. It seems inevitable that the BoE will downgrade its 2019 forecast for growth (and inflation), when the Monetary Policy Committee next sits on 7 February. While the BoE would like to increase rates to dampen underlying inflationary (wage) pressure, it is currently constrained by Brexit uncertainty. At time of writing, the market is assigning just a c. 50% probability of such a move by the end of 2019.
UK Equity Issuance
UK equity issuance proved slow to rebound from December’s rout, despite a recovery of global risk appetite and better market sentiment around Brexit. UK equity issuance amounted to £617.60m which, although representing a 20.56% rise from a very subdued December, was also a 74.81% decline on January 2018. Similarly, the deal count edged up to 16 from the 14 registered in December, still well down on the 27 recorded in January 2018.
As might be expected from the low level of activity, issuance was heavily concentrated at the sectoral level. Most notably, January saw the resurgence of Real Estate Investment Trust (REIT) offerings, accounting for more than 40% of monthly deal flow and at the highest value since September 2018. Financial Services and Software and Computer Services sector offerings also featured prominently and, together with REITs, accounted for more than 72% of total issuance. In aggregate, sectoral representation actually broadened a little to 11 from 9 in December and equal to that registered in January 2018.