The global stock market has staged a remarkable recovery from its record breaking crash earlier this year. The UK suffered as badly on the way down but, unfortunately for investors, has not fared as well on the way back up.
The slump
The FTSE 100 (the FTSE) crashed by over 34% in the first few months of 2020. In the process it smashed through the -20% and -30% barriers in only 36 and 39 trading days, respectively.
This is faster than any UK stock market crash in at least the last 34 years that we have daily data on returns for (Figure 1). It fell by 30% in almost half the time it took to fall that far from its peak in 1987.
In the eight months since, it has rebounded by 28% but still remains some 16% below its level from mid-January. The crash was unusually severe in a historical context, but what about this recovery?
In order to answer this we have looked at how long the FTSE took to recover from previous downturns. As there have only been five times that the market has fallen by more than 20% since 1986 (the longest period for which we have daily total return data), we’ve expanded this analysis to cover all crashes of 10% or more. Before 2020, this had happened 20 times since 1986.
Falls of this magnitude can take year to recover from
In general, if a market decline was less than 25%, the market has tended to recover pretty quickly (Figure 2). On only one occasion (1994) has it taken longer than six months. In 1998, a 24% decline was made up in barely three months.
However, on the few occasions when falls have been greater, the time to recovery has been much longer, closer to two years or more. It took three years to recover from the dotcom crash.
Against that backdrop, it should not be too surprising that the FTSE is still under water. If history is any guide, investors may have to prepare for a more drawn out recovery, potentially lasting until the end of 2021, or even later.
But is this time different?
History may be less useful than normal in working out what could happen to equity markets at present. While a drawn-out recovery may appear a reasonable expectation, equity markets in other parts of the world have been dancing to a different tune.
The US market is more than 10% higher than its January peak. Japan is up 4%. Emerging market equities are up 9% in local currency terms (5% in sterling terms). Eurozone equities are still down, but only by 6%. The UK is an outlier in terms of the weakness of its recovery.
We have to remember that the strength of the response from central bankers and politicians this year has been unprecedented. Governments have underwritten loans to companies and paid furloughed workers’ wages.
Central banks have injected tremendous amounts of liquidity into the financial system. We have never before seen support on this scale.
Equity markets are looking through the current malaise to an anticipated rebound in activity next year and the one after. That is why equity markets have recovered so strongly in parts of the world.
The question then is why the UK has been left behind? Brexit cannot be ignored, as the risk continues to influence international investors’ perceptions of the UK market.
The UK also entered the year with a relatively large allocation to commodity sectors, which have fared poorly.
UK stocks are cheap, the smaller the cheaper
But, there is a positive side-effect for the UK from having underperformed its global peers: it is currently very cheap in valuation terms compared with global stocks.
When it comes to investing, the question is not simply whether the UK market has poorer or more uncertain prospects than others but whether the market has already priced those risks in.
Given the historic discount the UK is trading on relative to global peers, it appears that a lot of risk has already been priced in.
At such depressed pricing, it might not take much in the way of better news for the UK market to start making up some of that lost ground on global peers.
As always, past performance, in this case poor past performance, might not be a very good indication of future performance.
This information is not an offer, solicitation or recommendation to buy or sell any financial instrument or to adopt any investment strategy. Any references to securities, sectors, regions and/or countries are for illustrative purposes only.
The value of investments and the income from them may go down as well as up and investors may not get back the amounts originally invested. Past performance is not a guide to future performance and may not be repeated.
Important information
This communication is marketing material. The views and opinions contained herein are those of the named author(s) on this page, and may not necessarily represent views expressed or reflected in other Schroders communications, strategies or funds.
This document is intended to be for information purposes only and it is not intended as promotional material in any respect. The material is not intended as an offer or solicitation for the purchase or sale of any financial instrument. The material is not intended to provide, and should not be relied on for, accounting, legal or tax advice, or investment recommendations. Information herein is believed to be reliable but Schroder Investment Management Ltd (Schroders) does not warrant its completeness or accuracy.
The data has been sourced by Schroders and should be independently verified before further publication or use. No responsibility can be accepted for error of fact or opinion. This does not exclude or restrict any duty or liability that Schroders has to its customers under the Financial Services and Markets Act 2000 (as amended from time to time) or any other regulatory system. Reliance should not be placed on the views and information in the document when taking individual investment and/or strategic decisions.
Past Performance is not a guide to future performance. The value of investments and the income from them may go down as well as up and investors may not get back the amounts originally invested. Exchange rate changes may cause the value of any overseas investments to rise or fall.
Any sectors, securities, regions or countries shown above are for illustrative purposes only and are not to be considered a recommendation to buy or sell.
The forecasts included should not be relied upon, are not guaranteed and are provided only as at the date of issue. Our forecasts are based on our own assumptions which may change. Forecasts and assumptions may be affected by external economic or other factors.
Issued by Schroder Unit Trusts Limited, 1 London Wall Place, London EC2Y 5AU. Registered Number 4191730 England. Authorised and regulated by the Financial Conduct Authority.