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Summary
- The rapid spread of the coronavirus and severe selloff by investors due to the crises had a long-term impact on stock markets across the globe.
- The UK’s major index, FTSE 100, has been underperforming as compared to many of the other major indices.
- The FTSE 100 has been down by around 24 per cent on a yearly basis and sectors such as banking, tourism and energy have been underperforming.
With large parts of the world entering into lockdowns, the first six months of the year were the most volatile time period the markets ever recorded. The rapid spread of the coronavirus and severe selloff by investors resulting from the economic fallout.
The stock indices around the world have enjoyed strong rebounds since the big selloffs in late February and March. Some markets have bounced back strongly recovering all losses. However, the UK’s most important index- FTSE 100 is notably lagging most of the other major indices. The FTSE 100 has been down by around 24 per cent on a yearly basis.
Do Read: FTSE 100 Market Movers: 10 Top Trades of The Day
Why Is FTSE 100 Underperforming?
There can’t be any one specific reason for the downfall but an already established trend could be one of the factors. Let’s have a closer look at some reasons:
- UK’s Brexit Referendum: The UK market had underperformed as compared to other major markets around the world ever since 2016 when the Brexit referendum took place, based on the fears of the potential economic fallout of Brexit.
- New Lockdown Restrictions- Due to a sudden spike in the number of coronavirus cases and the second wave of virus, further lockdown measures were imposed by the government which was announced by British PM Boris Johnson on 12 October.
To Know More, Do Read: FTSE 100 Recede as PM Announce New Local Lockdown Restrictions in England
- Composition- Composition: The current underperformance of the FTSE 100 index is not only because of the above-mentioned reasons. But the poor relative performance of the index is also largely compositional.
For example, more than 20 per cent of the FTSE 100 companies are from the financial sector as at the end of 2019. Accounting for around 14 per cent of the index, the energy sector is the UK’s second-largest component. Notably, both the sectors have underperformed this year.
Which Are the Sectors Dragging the FTSE 100 Down?
Following are the sectors which have not been performing well amid the Covid-19:
Banking Sector
Since the start of the crisis, banks have been particularly suffering, mostly because of the increased fears about loan defaults and the lowering interest rates. The shrinking personal income is also damaging the banks’ balance sheets. As stated earlier, the banking sector comprises one-fifth of the FTSE 100 index. Hence, the downfall in the performance of the banks such as Lloyds Banking Group PLC (LON: LLOY), HSBC Holdings PLC (LON: HSBA), etc. drags the index further down.
Energy Sector
Since the outbreak of Covid-19, this sector has had a torrid time. With the slump in demand due to lockdowns and recessions, the price of oil fell amid a brief price war between Saudi Arabia and Russia. These have been the reasons which are weighing heavily on energy shares. This is the result large oil producers in the index, such as Royal Dutch Shell (LON:RDSB) and BP PLC (LON: BP.) are not performing well.
To Know More, Do Read: BP and Shell share prices at 25-year low: Does this call for investment in oil stocks?
Tourism Sector
With every passing day, the coronavirus pandemic has brought the travel industry to a standstill leading to huge revenue losses being incurred by the airline companies and job cuts across the sector. The outbreak started in spring which is considered to be the revenue-generating time for the travel industry. The UK Airline Group, International Consolidated Airline Group S.A. (LON: IAG) have faced a continuous decline in its share prices.
Also Read: EasyJet and IAG Stocks Soften with Slump in Demand on New Quarantine Measures
Undervalued Stocks of the UK
Most seasoned investors intend to buy undervalued stocks. The objective behind this is that the investor will be buying the shares at a price lower than its perceived intrinsic value.
Let’s explore some of the most underperformers in the UK in 2020:
HSBC Holdings PLC (LON: HSBA)
Since the beginning of the Covid-19 pandemic, the outlook for the global bank has materially worsened. The bank is experiencing low-interest rates in many of its operating markets, leading to lower profitability and reduced net interest margins.
However, HSBC’s might witness improving returns in the long run due to its exposure to economies with long-term growth potential. The cost reduction plans could improve its efficiency and aid profit growth in future.
The stock traded at GBX 308.50 at 10:34 AM GMT+1 before the market closed on 19 October. The stock’s current 52-week low/high price was reported to be GBX 283.35/617.40. It had a market capitalisation of £62,396.07 million.
BP PLC (LON: BP.)
BP shares are still under heavy pressure. BP’s stocks were trading just over 500 pence at the beginning of 2020. With the global travel coming to a standstill in March, BP stocks crashed, hitting 52-week low of 222 pence. However, BP shares are slowly and gradually showing signs of recovery, representing an undervalued share investment.
The stock traded at GBX 208.05, at 10:37 AM GMT+1, before the market closed on 19 October. The stock’s current 52-week low/high price was reported to be GBX 206.45/516.40. It had a market capitalisation of £42,438.33 million.
Boohoo Group PLC (LON:BOO)
The online retailer that specialises in fashion continued its sharp upward trajectory through to July, where the shares breached 433 pence. However, the online retailer’s upwards momentum got a sudden halt after it was accused of facilitating slave-like working conditions in its factories. The shares have since then plunged to as low as 224 pence. Boohoo shares have actually recovered to 267 pence, gaining 19 per cent since hitting 224 pence.
The stock traded at GBX 275.00 at 10:40 AM GMT+1 before the market closed on 19 October. The stock’s current 52-week low/high price was reported to be GBX 157.50/415.00. It had a market capitalisation of £3,973.09 million.
Cineworld Group PLC (LON: CINE)
The shares of Cineworld were priced at 220 pence at the beginning of the year 2020. The very same shares were worth just 37 pence in August 2020, representing a decline of over 83 per cent in just 6 months.
However, the Cineworld shares are yet to get back to June 2020 levels, where the shares were priced at 100 pence, when the UK cinemas reopened.
The stock traded at GBX 26.15 at 10:42 AM GMT+1 before the market closed on 19 October. The stock’s current 52-week low/high price was reported to be GBX 21.38/230.00. It had a market capitalisation of £339.90 million.
British American Tobacco PLC (LON: BATS)
One of the largest tobacco producers in the world, British American Tobacco is currently trading at approximately 2,562 pence, which is far from its prior all-time highs. It recorded its all-time high in 2017, where the stocks hit 5,578 pence. Since then, the shares have been declining. The company is one of the best dividend payers on the FTSE.
The stock traded at GBX 2,618.50 at 10:44 AM GMT+1 before the market closed on 19 October. The stock’s current 52-week low/high price was reported to be GBX 2,382.00/3,507.00. It had a market capitalisation of £60,659.58 million.
