British stocks primed to reverse years of underperformance

UK stocks are primed to turnaround years of underperformance and embark on a “winning streak,” according to analysis by a top City consultancy.

London markets are ready to capitalise on the world’s top central banks launching a rate hike spree this year to get on top of inflation, according to Pantheon Macroeconomics.

The FTSE 100 and 250, the City’s top indexes, heavy weighting toward financial stocks, such as banks and funds, means they are primed to jolt higher amid a higher interest rate environment.

London shares have lagged behind stocks listed on Wall Street and on the Continent.

A shortage of tech stocks – a reason often cited for the UK’s relatively weaker equity offering – listed in London may actually work in Britain’s favour this year.

“UK equities tend to fare relatively well when interest rate expectations increase, as higher rates reduce the present value of the expected profits of tech firms,” Samuel Tombs, chief UK economist at Pantheon, said.

High street lenders on the FTSE 100, including Barclays, HSBC, Lloyds and NatWest are set to boost the capital’s premier index in 2022.

Higher interest rates widen banks’ net interest margin, a key source of income, and allows them to charge higher rates on loans, boosting their profitability and making their shares more attractive to investors.

UK stocks “have the potential to remain on a winning streak, provided the wider economic and political backdrop remains favourable,” Tombs added.

Sharp equity fluctuations that have mired US markets since the start of the year have not materialised in London.

The MSCI UK index is 3.2 per cent higher than its level at the end of 2021. Meanwhile, Wall Street’s tech-heavy Nasdaq and S&P 500 are down 10.53 per cent and 6.52 per cent respectively since the start of the year.