One of my favourite sleight of hands when talking to investors is to show the chart below (courtesy of Sharepad). It demonstrates the historic under performance of the UK’s FTSE 100 index compared to the equivalent US benchmark, the S&P 500. In the chart below the US chart is in green, the UK index in black with the 20 day moving average in red and the 200 day MA in blue. I said sleight of hand earlier because in reality of course we are not quite comparing like for like. The FTSE 100 is  not an index measuring UK PLC in any meaningful way, rather an unruly collection of sectors that have fallen out of favour. Crucially the UK market  suffers from an almost complete absence of tech stocks.

The second chart below (with the same colours) shows that gap in performance over the last few months of the Covid emergency.

As you can see, all the way through to mid March the FTSE 100 was holding ts own (although still under performing) but since then the gap has become cavernous, again!

Now, one of the few consolations of this exercise in national humiliation has been the abiding thought that the UK was probably in good company, with most European markets also suffering consistent under performance.

Not any more.

A note out today from equity analysts at Morgan Stanley suggests that even our continental chums have now over taken us. Importantly though this analysis suggests that the rot has begun to set in much further down the market cap scale here in the UK. Traditionally for instance UK mid caps have tended to keep up with their American cousins, sort of. But the curse of under performance is, according to MSCI, broadening out. They observe that the “MSCI UK is the worst-performing major country/regional index year-to-date, having fallen by 19% versus MSCI Europe down 11% and MSCI World down 5%. Although the headline UK index has been lagging its rivals steadily for much of the last decade, the magnitude and breadth of this under performance has accelerated recently.“

They cite two examples:

“• Severe UK under performance has now spread from the large-caps to the smaller-caps too, with the MSCI UK SMID index under performing the World SMID index by 10% over the last 6 months, its worst run-rate since 2003.
• Although its still early in the month, it is noteworthy that every UK sector has under performed its European peer month-to-date; if this trend persisted through the full month, it would be only the second time in five years that this has happened. ”

The two charts below speak to these narratives.

How do we explain this worrying trend ?

Most investors point to this under performance – and the low weightings to UK stocks – via two narratives. The first is that sectoral explanation. But the MSCI analysis suggests that this really isn’t the case as the mid and small cap indices have much lower exposure to the ‘wrong’ sectors.

The next handy explanation is Brexit. I’m sure that has some explanatory power but again I’m not entirely convinced. First off no one knows anything about what might happen including the main negotiators in Brexit and secondly I can’t help but think that these concerns have been baked into the price for many months. Sure, a no deal hard Brexit could be a complete (avoidable in my view) pain but no one can say they’d be surprised if that happened. If markets are supposed to be forward looking prediction engines, why the hell haven’t they priced that possible outcome in many, many moons ago ?

No, a more convincing narrative for me is that investors have decided that the UK hasn’t had a good viral emergency. They know we’ve suffered an excess of deaths and they know that UK consumers know that as well. We all collectively have been scared to death (well, at least all those aged over 40) and that we’re now increasingly reluctant to loosen our wallets. The Chancellor has explicitly acknowledged that challenge and all that global investors are doing is awarding a discount for poor policy outcomes in dealing with the virus. Continental Europe by contrast has had a much better crisis and so far looks like its getting a better handle on the inevitable next waves.