[Charlotte De Kerpoisson]
On the 31st of July, the FISC 100 index in the UK hit an all time high of 10,989 points, and this momentum continues.
In this podcast, we'll focus on the UK stock market and explore why it has reached such eye watering heights.
We'll talk about the reasons for investing there now, particularly in value stocks, and we'll look at the drivers of the UK financial market in general.
Hello and welcome to this podcast by BNP Paribas Wealth Management.
I'm Charlotte de Kerpoisson.
Today, I'm joined by Edmund Shing, Global Chief Investment Officer.
Hello, Edmund.
Great to see you again.
[Edmund Shing]
Hi, Charlotte.
Good to see you too.
[Charlotte De Kerpoisson]
What a year it's been for UK based investors who are experiencing euphoria.
Despite the economic and political uncertainty in Britain, stock markets have shown resilience and growth.
Most people know that the UK equity market is influenced by a combination of domestic and global factors.
But Edmund, what are the particular drivers you see of this stellar performance of late?
[Edmund Shing]
I'm not sure I'd call it euphoria, first of all.
Certainly the performance of the UK equity market this year has been good, but it's been good everywhere throughout the world, actually.
US, rest of Europe, clearly Asia.
It's a global phenomenon, but certainly the UK has played its part.
And if we were to look at why, well, as I said, firstly, the global trends of stronger earnings results is one thing, and we've seen earnings forecasts rise.
And that's just as true in general for UK equities as it is for European, US or Japanese equities.
I think secondly, we do see foreign investors becoming more interested in UK stocks.
In particular, not just stock market investors of the normal type like pension funds and insurance funds, but actually more companies who are looking to buy out UK companies, particularly in the middle market, notably the FTSE 250 or FTSE small cap indices.
So that has absolutely been a very strong and important trend in the UK stock market this year.
And it highlights the fact that UK stocks in general are cheap.
And there's no doubt that the UK stock market remains relatively cheap, much cheaper than, of course, the US, but also much cheaper even than continental Europe today.
As we think about the economy, we have to remember, particularly talking about the FTSE 100 index, that it is a very global economy dominated by heavyweights, not only in banking, but also in health care, in oil and gas and in mining.
Very global sectors.
And so the exposure to the domestic UK economy, particularly of large caps, is not that great.
So I would say that the UK economy is experiencing some difficulties at the moment, but I don't think that that necessarily has a big impact, particularly on large caps in the UK.
What is much more important is what happens globally, such as the strength of commodity prices, thinking about industrial metals, precious metals, and now, of course, energy, all of which are boosting the commodity related companies, which are well represented in the FTSE 100.
[Charlotte De Kerpoisson]
The UK's flagship share index, established in 1984, focuses on large cap value stocks and defensive or non sequitur stocks like energy, financials and consumer staples, providing stability during uncertain times.
Edmund, could you give the pros and cons of these two types of stocks?
And secondly, which sectors do you like particularly at the moment?
[Edmund Shing]
Well, let's start with defensive stocks, because that's easy.
Defensive stocks tend to outperform when the market either trades sideways or even when it corrects and falls.
Defensive stocks, because of their low beta characteristics, tend to suffer less.
Why?
Because they're less sensitive to either the UK or the global economy.
Typically demand is more consistent over time for their products or services.
And that is why they're prized by investors, particularly at times of greater volatility or greater economic difficulty.
At the moment, it depends which defensive stocks you're talking about.
So healthcare, I think, actually is performing relatively well globally and also in the UK.
However, on the other hand, if you think about consumer staple stocks, particularly food and beverage stocks, they're experiencing a lot more difficulty.
I would say in particular the beverage sector, and we can think about companies such as Diageo in this sense, are suffering.
And they're suffering because actually you're seeing a slow decline of demand globally for alcoholic beverages, in particular for wine and spirits.
And that is reflected in the share prices of spirits makers like Diageo.
So again, with these defensive stocks, some sectors like healthcare do well, but others like consumer staples are experiencing what I think are structural difficulties at the moment.
What we really prefer in the UK are value stocks.
Now these are more cyclical.
They're cheap.
They are more cyclical.
So they are more sensitive to economic conditions.
But in particular, if you think about industrial or commodity related conditions, these are pretty bullish at the moment.
You, of course, have the AI boom going on, which is actually leading to heavy investment globally.
And UK stocks are also benefiting from this industrial renaissance.
And as I said, they are cheaper stocks when the economy is in a bit of an upswing globally than the cyclical sectors.
Thinking about industrial goods, for instance, or mining or energy tend to do better.
And of course, with everything that happens in the Middle East, energy prices are very high, helping oil and gas stocks, commodity prices such as industrial metals and precious metals also flying relatively high.
And that is helping very much the global mining companies that are well represented in the FTSE today.
[Charlotte De Kerpoisson]
It's not only UK large caps that have seen a solid upward momentum recently, but UK mid caps are also breaking out to new all time highs.
What are the drivers there?
[Edmund Shing]
I think the drivers for the mid caps, which I think we think about more the FTSE 250 index here, which is just underneath the 100 in terms of market capitalisation, are very interesting niches.
There's quite a heavy industrial representation in sector terms amongst the mid caps.
And what we are seeing is very strong demand both for industrial companies and also technology related companies because they are relatively cheap versus global peers.
And what we are seeing is either industrial players, bigger industrial players from overseas in these sectors, or indeed, even private equity firms looking to take over and buy out these companies.
And so we are seeing a lot of merger and acquisition activity take place in the FTSE 250.
You could argue that, you know, I've seen comments that the UK is selling off their family silver.
And to some extent, I think that's true.
Some very, very good companies in the UK in the mid cap sector are being bought out at relatively interesting valuations by either industrial competitors who are bigger overseas or indeed private equity firms who think that they can improve the companies and probably sell them for more in a few years' time.
So that's certainly the biggest motor behind the FTSE 250 index.
And I'll note that the 250 index as a whole hit a peak only at the end of August.
So it's still flying just as high, I would say, as the UK 100 today.
[Charlotte De Kerpoisson]
Now let's compare the UK with global markets.
Since April 2025, a UK based investor in global equities would have enjoyed a whopping 46 % return.
By comparison, UK value stocks have performed substantially better at around 60 % in sterling.
Edmund, what are these value stocks and could I still capture growth in them?
[Edmund Shing]
Well, the value stocks, again, they typically are cyclical value stocks.
So which sectors are we principally talking about?
As I said, commodity related sectors such as oil and gas and global mining, financials—particularly banks and insurance companies.
And thirdly, industrial, certainly in the industrial segment, there are a number of value stocks there as well.
I mean, I've already talked about the mining and industrial companies.
A lot of the industrial companies have been taken over.
A lot of the mining companies and the oil and gas companies clearly benefiting from very high commodity prices, which has boosted their profit margins and their earnings growth.
But also banks.
Banks have surprisingly done well in the UK.
There are two types of banks: the global or overseas and Asian related banks such as HSBC and Standard Chartered, and the much more domestically focused banks such as Barclays, Lloyds and NatWest.
Both segments have actually done very well in recent times.
Both segments benefit from stronger balance sheets, more beneficial long term interest rates, and also positive loan demand.
It's still a cheap sector.
If you look at where these banks traded back in 2008, certainly for Lloyds and NatWest, they're still far, far, far away from their 2008 peak pre‑financial crisis.
If we look at where the share prices are today, even after stellar performance from UK banks over the last one and a half years or so, they still all pay, whether you look at the oil and gas sector, the mining sector or banks, pretty hefty dividends.
So the dividend yield in terms of income is also fairly attractive.
And you're absolutely right, Charlotte, if we look over the last one, three or five years, UK value stocks, when priced in dollars, have consistently outperformed the US S&P 500 index.
So it's not the case that the only place to be for a stock market investor over the last few years was the US.
Actually, the UK and UK value in particular has performed surprisingly well and outperformed over these time periods.
[Charlotte De Kerpoisson]
So if the UK market, particularly equity, is running high at the moment, is it really good timing to enter the market right now or consolidate existing investments?
Shouldn't people be rather selling?
[Edmund Shing]
Look, this is a stock market fallacy.
When markets hit all time highs, more often than not, they go on to make further all time highs weeks, months, years into the future.
So ultimately, when you look at the statistical evidence, buying a stock market at an all time high is a better than average time to be buying stocks, bizarrely enough.
And that's simply because the momentum that exists, both fundamental and technical, tends to continue for longer than people think to the upside.
At the moment, we absolutely see relatively strong economic momentum globally; economic growth is actually probably more solid than one would expect, particularly in light of the Middle East conflict and high energy prices.
In turn, that is reflected in the higher earnings growth forecast.
So the earnings outlook for companies across the world, including in the UK, is pretty healthy right now and being revised higher.
So the momentum at a fundamental level is still rather positive.
And the UK stock market benefits, as we mentioned before, from a low relative valuation compared to continental European stocks or US stocks.
So I think we have a fundamental momentum argument.
The valuation argument is still there.
And you're still getting a healthy income through dividends from either the large caps, the FTSE 100 or the mid cap.
So I think, yes, people should buy now because that momentum should, other things being considered, is likely to continue.
[Charlotte De Kerpoisson]
Could investors top up an investment in UK equities with a pocket of UK gilts?
[Edmund Shing]
Well, UK sovereign bonds, known as gilts, are actually quite an interesting proposition right now.
There are clearly concerns about the fiscal state of the UK government finances.
State spending does need to be brought under control.
And there is a budget coming up in the next month or so.
So the new prime minister and, more importantly, the new chancellor of the Exchequer, Mr Healey, will have to send signals to the market that the current Labour government are taking control of government finances and trying to put them in better order.
And that clearly will require some tax increases as well as some reduction in government spending.
If they achieve that, then I think an investment today in UK government bonds actually could be a very good investment because, if you look at developed bond markets around the world and you look at the 10‑year maturity segment, UK gilts are one of the highest yielding, yielding well over 5 % at the moment for a 10‑year gilt.
Now that compares to on average just over 4 % for a Eurozone bond on average if you mix all of the countries together, or in the US you're just under 5 % for a 10‑year.
So an investment in UK gilts will give you a higher starting yield than either from continental Europe, the US or indeed Japan.
Now the question is, do we get better economic fundamentals either in terms of growth and also in terms of better budget balance?
That is the question.
But I think frankly a lot of bad news is already priced into the UK gilt market at the current time and the potential for an upside surprise is therefore actually pretty, pretty high.
So yeah, I would say now is a good time to be starting to accumulate an exposure to UK government bonds as well as UK stocks.
[Charlotte De Kerpoisson]
Thank you, Edmund.
And thank you to our audience for listening to this podcast.
Please like, share and subscribe to our weekly podcast.
For more of our investment strategy research, please visit our website.
Goodbye.