UK shares won't make up lost ground - Capital Economics

UK shares will not continue to underperform but they will fail to make up the ground lost to other countries, Capital Economics said as it cut forecasts for the FTSE 100 in 2020 and 2021.

Since equity markets plunged in March the UK has underperformed the US and other markets. The S&P 500 is down 1% from 19 February but the FTSE 100 is down 19%.

The reasons for this underperformance against the US are mainly a larger weighting in the UK towards energy, financials, utilities and other sectors hit hard by the virus and the boost the US market has received from big tech stocks such as Apple, Facebook and Google, Capital said.

The remaining 5-point gap may be explained by the big hit to the UK economy from Covid-19 and troublesome Brexit talks, Capital said.

This drag will fade if the virus is contained and economies start to recover, allowing underperforming sectors to do well, Capital said. US big tech companies are unlikely to keep outperforming. If there is a Brexit deal a rise in the pound will be offset by the good news on Brexit.

But Capital's UK economist Andrew Wishart said he no longer expected UK shares to make up their lost ground. Persistently ultra-low interest rates will hit banks, which are a big part of the FTSE 100, and there is little sign of an economic boost to equities, he said.

"The upshot is that we are revising down our FTSE 100 forecast from 7,100 to 6,200 at end-20 and from 7,860 to 6,600 at end-21 before it regains its pre-virus level of about 7,500 at end-22," Wishart wrote in a note.

If the UK and EU fail to agree a Brexit deal the FTSE 100 may not fall because the pound would fall, boosting foreign earnings which make up 77% of FTSE 100 earnings.

"So for the FTSE 100 a no deal may result in much the same outcome as a Brexit deal, but for different reasons," Wishart said.