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The MSCI UK Index generally underperformed the rest of the MSCI World Index of developed market (DM) equities for much of 2020. Strategists at Capital Economics think that UK equities will outperform their peers elsewhere this year, as some of the headwinds that they faced in 2020 fade or even act as tailwinds.

Key quotes

“The largest performance gaps (such as those in the IT, communication services and consumer discretionary sectors) can be mostly explained by the stellar performance of some of the largest listed tech stocks in the US during the pandemic. Given that these big tech firms stood to benefit the most from pandemic-induced restrictions, we don’t expect them to perform quite as well once vaccinations allow restrictions to be eased this year.”

“Now that the uncertainty about the future relationship of the UK and EU has been removed and a ‘no deal’ scenario avoided, we think that it is more likely that the discount that UK equities have been trading at since 2016 will gradually unwind a little, rather than widen further.”

“We forecast the MSCI UK Index to end the year at around 2,100, an increase of ~16% from its current level, compared to our forecasts of a ~8% rise from the MSCI USA Index and a ~10% rise from the MSCI EMU Index. This translates into a forecast for the FTSE 100 to end the year at around 7,500, compared to around 4,200 for the S&P 500.”