The UK’s FTSE 100 Index may be at an all-time high, but the fallout from the Labour government’s budget is showing up in a slew of weak trading updates with the pain likely to be concentrated in domestic stocks.
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Published Jan 20, 2025 • 3 minute read
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(Bloomberg) — The UK’s FTSE 100 Index may be at an all-time high, but the fallout from the Labour government’s budget is showing up in a slew of weak trading updates with the pain likely to be concentrated in domestic stocks.
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The record comes courtesy of a clutch of big firms whose foreign-currency earnings are boosting their bottom line as the pound falls. But the main mid-cap index, the FTSE 250, remains well off its peak as some of the biggest high street names struggle with Chancellor of the Exchequer Rachel Reeves’ package of tax hikes.
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As the reporting season kicked off, Britain’s biggest supermarket Tesco Plc and Marks & Spencer Group Plc flagged the uncertain economic outlook and increased costs due to the higher payroll levies. Rival J Sainsbury Plc said it would have to stagger a planned wage hike. Next Plc, which operates hundreds of clothing and home stores across the UK, has already nudged up prices.
“We see a mixed picture for the upcoming earnings season,” said Emma Mogford, a fund manager at Premier Miton Investors. “It continues to be an environment which favors the larger and stronger companies.”
The consensus estimate among analysts for the FTSE 100 is that earnings will increase by about 6% for 2025, compared with a broader European market forecast of 8%. They’ve continued to trim forecasts for the UK market since Reeves’s October budget, while revisions elsewhere in Europe have stabilized since the start of the year, according to a Citigroup Inc. index.
The FTSE 250 Index — which includes more domestic-focused firms — remains about 5% below its summer high even after milder-than-expected inflation data last week offered UK assets a respite.
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“Mid-caps have been hit by continued weak domestic growth,” said Goldman Sachs Group Inc. strategists led by Sharon Bell. “PMI data suggests no sharp turn in estimates is likely near-term.”
That’s left UK stocks looking cheap. Price-to-earnings ratios show the wider FTSE 350 trading at a 15% discount to the Stoxx Europe 600 and an almost 50% discount to the S&P 500. Recent price action suggests a lot of downside is already priced in, the Goldman strategists said.
A closer look at individual industries reveals even weaker valuations.
The Bloomberg UK Homebuilder Index trades at a price-to-book ratio of less than 1 — which loosely means investors regard the sector as worth less than the land it owns. Swap rates that are used to price mortgages remain firmly above 4% as government bond yields have climbed. That’s hindering a pickup in housing demand, even after this week’s good news on inflation. Investors will be closely monitoring the Bank of England’s decisions, with expectations for a 25 basis point cut in February.
Meanwhile, recruitment firm Pagegroup Plc cut its profit guidance while Robert Walters Plc warned of a weaker-than-expected fourth quarter, with both citing muted client and candidate confidence. Hays Plc gave a similar update. According to a report by the Recruitment & Employment Confederation and KPMG, hiring by British businesses fell by the fastest pace in 16 months.
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The uncertain outlook for UK earnings and the economy illustrates why the market has been lagging continental Europe for years. The FTSE 100 is up only half as much as the blue-chip Euro Stoxx 50 over the past decade, in local currency terms, and the latest lackluster economic print suggests Labour will struggle to rekindle growth.
But January’s 2.4% slide in the pound, elevated interest rates and higher energy prices are all seen as a positive for the large-cap benchmark, whose members generate about 75% of revenue outside the UK, this year.
The FTSE 100’s “international exposure is helped by its low valuation, high dividend and the weaker pound,” said Rajeev De Mello, a global macro portfolio manager at Gama Asset Management SA. At the same time, “more domestic segments of the market will remain under pressure. The sharp rise in gilt yields is a headwind,” he said.
—With assistance from Maggie Shiltagh, Sagarika Jaisinghani, Henry Ren and Neil Campling.
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