UK equities lag US on appetite for growth

Optimism returned to capital markets in February, mainly fuelled by good results from US

tech stocks. The UK reporting season also peaked last month but here the news was mixed

and left the domestic market trailing its American counterpart. The appetite for tech and

growth stocks returned and left UK stocks lacklustre partly because of their bias to value.

Consequently smaller companies, where expectations of growth drive sentiment, had a

better month than the middle and larger sized companies.

Expectations of changes to interest rates were volatile and early hopes of cuts were trimmed

back as the month progressed. Perceptions that inflation is stickier in the UK than the US led

participants to believe that rate cuts in the UK will be later than in the US and contributed

towards a slight strengthening of sterling against the dollar. That too had a modest negative

impact on larger UK stocks with their tilt towards overseas earnings. When translated back

into the home currency those profits buy slightly fewer pounds.

An additional blow to the UK market, where several large mining companies are listed, was

concern about the prospects for China. It is now the largest market for many important

commodities and weakness in demand there was reflected in lower prices for some. This

was undoubtedly a factor in the negative return of the Material sector in the UK stock

market. This was the second worst after Real Estate where the impact of Covid on changing

work patterns is still being digested.

Other sectors with negative returns were Utilities, Consumer Services and Communication

Services. However, on a positive note, and suggestive of some optimism in the domestic

economy, was a strong return from the Industrial Sector closely followed by Information

Technology. Energy and Financials also made encouraging progress over the month.

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