Written by Mr. Kunal Sawhney, CEO, Kalkine Media
London equities have remained highly volatile in the present calendar year, with the benchmark FTSE 100 gaining around 10% on a year-to-date (YTD) scale, much lower as compared to the leading European peers and the three major Wall Street stock averages. As the year was initially seen as the period of recovery, the domestic shares have failed to resurrect the confidence of market participants following the persistent challenges in the operative environment, as well as uncertainty around pandemic.
The mid-cap index FTSE 250 has performed relatively well as compared to FTSE 100 in the present year as a large section of medium scale businesses have staged a significant comeback, effectively driving up the market index.
On the other hand, CAC 40 of France, Dax of Germany, FTSE MIB of Italy, Dow Jones Industrial Average, Nasdaq Composite and S&P 500 of the United States have risen 15-30%. The sharp recovery in the underlying components on the back of improved business sentiments, better-than-expected quarterly results and favourable projections for the full year have materially lifted the investors’ optimism.
The fresh resurgence of Covid cases across many European countries with the Austrian government imposing a 10-day nationwide lockdown has re-ignited the worries as investors fear that such instances can categorically derail the economies from the path of recovery. Alongside Austria, several other leading economies are contemplating the course of local Covid activity in respective regions to formulate the plans for re-introducing stern restrictions or national lockdowns.
The imposition of country-wide lockdowns, strict social distancing mandates and restricted domestic as well as international travel have been the most-effective strategy that has helped consequently in bringing down the daily rate of infection and hospital admissions. The restart of games and sports on a larger scale have provided much-needed support to the ailing hospitality industry as fans have returned to stadiums in full capacity, effectively kick-starting the sports hospitality section.
The national lockdown in Austria once again dampened the mood of holidaymakers as hospitality and aviation industries are yet to witness a meaningful recovery from the Covid-led troughs. If the Austrian healthcare administration fails to curb the rate of infection, the national lockdown can be potentially extended up to 20 days.
As far as the performance of domestic equities is concerned, the evolving nature of the Covid-19 pandemic continues to handhold the market direction as almost every other blue-chip corporation remains susceptible to the ongoing disruptions due to the extended course of pandemic and wide range of unforeseen implications.
The year started on a pessimistic note, with Britain witnessing the double whammy of third national lockdown and the aftereffects of newly agreed arrangement between the United Kingdom and the European Union following the termination of the Brexit transition period. The phased roadmap of exit from the lockdown restrictions, strict border control measures and the social distancing guidelines by the Downing Street administration partly relieved the market participants.
The massive emergence of cases linked to the Delta variant and the subsequent slowdown effectuated by ‘pingdemic’ furthered the pain for equities. The aftereffect of a sharp increase in the rate of hospitalisation, increasing pressure on the healthcare authorities was evident from the performance of equity indicator as the headline FTSE 100 erased all the gains within four-and-half months between 4 May and 20 September.
As per the historical data available with the London Stock Exchange, FTSE 100 returned to 6,903 on 20 September 2021. The index concluded at 6,923 on 4 May. The equity market sentiments started to recover from the third week of September in the run-up to the corporate earnings as businesses operated with the minimum restrictions for the first time in the July-September quarter in the pandemic period so far.
The resurrection of confidence was largely on the back of higher-than-anticipated earnings and the expectations of robust consumer spending ahead of the festive season, with almost every other food and accommodation business looking forward to realising considerable upsurge in the respective revenues.
However, the elongated concerns due to the pandemic continued to hurt the operations as businesses were unable to resume the operations at maximum possible capacities. The faltering supply chain and logistics systems, short-staffed functions, higher input prices, unavailability of key components for the manufacturing sector, services industry facing acute untimeliness in orders, rate of inflation mounting to a three-decade high and inadequacy of resources furthered the pain.
In the longer run, the domestic markets are well-positioned to make newer highs as the benchmark FTSE 100 registered a fresh 20-month peak in the present months, riding on the back of upbeat earnings and positive, forward-looking statements by a considerable section of heavyweight companies. Continuing the momentum, FTSE 100 can evidently breach the psychological level of 7,500 by the end of this year.
However, the persisting tensions in the Euro Area could delay the recovery process by a couple of months as markets can witness a sharp U-turn from here if there is a major disruption in the business operations due to the re-emergence of Covid cases in the UK. The government has, however, made vibrant progress in vaccinating the people and providing a booster dose to vulnerable patients.
The rising vulnerability of double-jabbed people towards the virus even after the country-wide roll-out of the third dose has been a major area of concern as healthcare administration is unable to contain the spread at a time when the majority of the population has received the complete two-dose regimen of Covid-19 vaccine.
Given the present state of uncertainty amid the markets, the upcoming weeks will remain volatile for equities as a suspension of travel and cross-border movement by a number of countries could potentially hurt the equities as the disruptions will also affect the international trade and subsequent uptake of British-manufactured goods in the EU, as well as non-EU regions that command a proportionately highly section of exports from the UK.