Three years since the pandemic
Three years ago, the UK, as most of the world, has been abruptly hit by the COVID-19 pandemic, yet the UK economy is currently experiencing one of the highest inflation rates and slowest growth among the OECD countries[1]. The UK current economic position has been exacerbated by other challenges such as, the decline in its global competitiveness in trade as one of Brexit’s major ramifications[2] and the rise in energy prices due to the Russo-Ukrainian War.
To curb inflation the Monetary Policy Committee (MPC) of the Bank of England (BoE), comprising nine members who meet eight times a year to decide what monetary policy action to take, has raised the interest rate a total of ten times within fourteen months from 0.25 percent to 4 percent, the highest level since the 2008 global financial crisis[3]. Higher interest rates, in turn, limit businesses’ cash flow, make their debts more expensive and eat up their profits. Thus, it became an immutable fact that UK business environment has substantially changed in the last three years. In light of these serious setbacks, this article analyses the UK financial market over these past three years to examine which industries and companies have performed best and worst amid these recent challenges.
The main objective is to find which industries and enterprises transpire as winners and losers since January 2020. The key findings are that the winner industries are healthcare and energy, whereas the losers are real estate, consumer discretionary and financials. More importantly, industries such as information technology (IT), materials and industrials that were outright winners in the teeth of the pandemic floundered in the subsequent two years, while industries such as utilities and energy that suffered at the outset of the pandemic, managed to quickly recover afterwards.
FTSE All-Share (FTAS) index has only rebounded shy of 7 percent
I have chosen to examine the FTSE All-Share (FTAS) index as it encompasses 641 of around 2,000 companies traded on the London Stock Exchange with a net market capitalisation of £2.42 trillion[4]. FTAS index is the aggregation of the FTSE 100, FTSE 250 and FTSE Small Cap indices, and in turn, it can be considered as a reliable measure of the UK economic performance. All calculations were based on raw data obtained from London Stock Exchange[5].
My investigation starts on 30 January 2020 when the first two COVID-19 cases were confirmed in the UK. Since that date, the FTAS index has only rebounded shy of 7 percent. The leading industries are healthcare, rising in excess of 54 percent and energy, increasing by more than 32 percent (see figure 1). Share prices of healthcare companies such as Indivior, Spire and Astrazeneca are up by 915, 87 and 43 percents respectively. Among all industries, it is no surprise that healthcare has achieved the top place. The pandemic, followed by patient backlogs in the NHS, had led more people to seek medical attention from private healthcare providers- it was reported that around 13 percent of UK adults paid for private medical care in 2022[6]. Similarly, shares for energy companies such as Drax, Energean and Cairn have risen by 131, 54 and 43 percents respectively. The strong performance in the energy sector is attributed to high oil and natural gas prices caused by rising demand from the recovering industries after the pandemic year. This is also accompanied by tight supply due to low investment in production capacity and supply disruptions after the Russian interference in Ukraine.
On the other hand, the two worst performing industries are real estate, tumbling by more than 22 percent, and consumer discretionary, down by less than 8 percent (see figure 1). Higher borrowing costs as a result of increasing interest rates, along with higher food and energy bills, are slowing down the property market by putting the squeeze on many prospective homebuyers. This can be seen in real estate stocks which are currently the weakest among all industries causing concern for investors. For example, Foxtons’s share price, a London’s leading estate agency, has fallen by as much as 54 percent in the last three years.
Likewise, consumer discretionary businesses such as Carnival Corporation, a cruise operator, and the Restaurant Group, a British chain of restaurants and pubs, have dropped around 71 percent, while other consumer discretionary businesses such as National Express, Asos, Moonpig and Superdry have shrunk by more than 68 percent of their share prices. Consumers spending habits, under government lockdowns and restrictions, have changed. For instance, many people have been stockpiling and others switched to online shopping. This caused many people to cut down on most discretionary spending by prioritising their spending on staples such as food and personal care over household goods, restaurants, hotels, and leisure. However, a big chunk of this cutdown in the nonessential spending was a result of the government travel restrictions, for instance share prices in the travel sector lost more than 42 percent of its pre-pandemic level.
Moreover, industries such as consumer staples, rising in excess of 6 percent, and industrials, increasing by 5.5 percent, have moved at a similar pace as the FTAS index (see figure 1).
Figure 1. FTSE All-Share (FTAS) industries, percentage change from 30 Jan 2020 to: 22 Feb 2021 and 3 Feb 2023.
Source: Author’s calculations.
Three stages over the last three years
The above analysis could be equivocal. Evaluating the stock prices over the whole three years and disregarding sudden price movements due to different shocks could only give partial views of the situation. Accordingly, I divided the three-year period from 30 January 2020 to 3 February 2023 into three stages: the lockdowns, the reopening, and the cost-of-living crisis stages (see figure 2). This three-stage split helps us to pore over any dramatic fluctuations in stock prices or any considerable changes in investors’ behaviour.
Figure 2. FTSE All-Share (FTAS) industries, percentage change over the three stages.
Source: Author’s calculations.
Although the first COVID-19 vaccine for the UK was approved in December 2020[7], the lockdowns stage continued until 22 February 2021 when a four-step roadmap for lifting the last lockdown restrictions was announced after realising the effectiveness of the vaccination. Toward the end of this stage, the UK economy had been devastated by three lockdowns with production 9 percent below where it was since the first lockdown started[8]. FTAS index fell by more than 7 percent. Utilities, real estate, communication services, financials and energy saw the largest drops in share prices, with the biggest fall coming in utilities industry, which tumbled by almost 20 percent. For example, the shares for Centrica, one of the leading suppliers of gas and electricity to UK domestic customers and operating under the names of British Gas and Scottish Gas, shrank by more than 38 percent. Conversely, the major winners of this stage were IT (Kainos increased by 80 precent; Alfa rose by 48 percent) and materials (Antofagasta rocketed by 124 percent; Treatt rose by 84 percent).
The reopening, the second stage, lasted to 23 February 2022, the day before the Russo-Ukrainian War. In this stage, the UK economy has grown back to the pre-pandemic levels. Inflation began rising but then it was perceived as a temporary and unavoidable consequence of the fiscal stimulus policies such as the multi-billion pound ‘Plan for Jobs’, the stamp duty holiday, the temporary VAT cut from 20 percent to 5 percent for hospitality and leisure, and the ‘Eat Out to Help Out’ scheme. Concurrently, FTAS index rose 13 percent with communication services and utilities, the losers in the first stage, claimed the top two places, increasing by more than 36 and 30 percents respectively. For example, BT, one of the largest British telecoms companies, experienced nearly a 60 percent rise in its share prices. In the utilities industry, Centrica, one of the biggest losers in the previous stage, was up by nearly 48 percent, National Grid jumped by more than 35 percent and Severn Trent by more than 30 percent. More broadly, all industries’ share prices in this stage stopped shrinking except the materials that dropped by 2.5 percent. For instance, Hochschild, a leading British-based silver and gold mining company, has seen their share prices tumbled by more than 50 percent.
During the third stage, the cost-of-living crisis, inflation became a serious threat reducing real income. In an attempt to control and return inflation to target, interest rate has been raised ten times between December 2021 and February 2023. Besides high inflation and declining real income, the UK economy is on the brink of recession with slow growth and is facing rising energy prices stemming from the war in Ukraine. In the UK financial market, most industries have imploded apart from healthcare, utilities, and energy (see figure 2). Among the big losers, such as real estate (plunged by more than 18 percent), have been the big winners in the first stage: materials (dropped by less than 10 percent) and in the second stage: communication services (fell by less than 14 percent).
Figure 3. FTSE All-Share (FTAS) selected companies, percentage change from 30 Jan 2020 to: 22 Feb 2021 and 3 Feb 2023.
Source: Author’s calculations.
Outlook for the ensuing years
Which direction will the UK stock market industries be heading? And which of its observed characteristics during the last three years will continue in the ensuing years and which will die out? Current loser industries and companies will find it very difficult to bounce back in the medium term, particularly with the current interest rate levels. That being said, a corporate spending tax break, stimulating the supply side of the economy, could serve as a catalyst for these industries to pull through.
Stock market for the real estate industry will remain flat. With the high mortgage rates and rising cost of living, more homeowners will struggle to make mortgage repayments and many prospective homebuyers will be driven away, in particular by the uncertainty in the property market. Another controversial industry is IT, performing very well at the onset of the pandemic but stumbling in the last two years. Competition is already fierce in this industry, and it may even become more challenging as most IT companies are now stepping into a new phase of integrating digital information and physical products, and this process requires more expensive physical capital. IT companies that can withstand or avoid this shift from ‘bits’ back to ‘atoms’, will not only see a quick upturn, but will also be more likely to lead an economic recovery among the remaining industries.
In addition, financials industry, especially the banking sector, will be hurt by persistently high inflation, rising interest rates and uncertainty. However, controlling inflation and putting increasing interest rates on pause will send a positive message to investors in this industry.
On the winning side, healthcare shares maintained a steady increase of more than 10 percent every year and a positive trend is expected to persist. Despite the pandemic, A&E overcrowding, patient backlogs, and NHS strikes, healthcare industry has shown remarkable resilience and diversity covering a wide range of sub-sectors, from biotechnology and pharmaceuticals to insurance coverage and medical technology. Another tailwind factor is the UK ageing population[9]. The future increase in the proportion of older people will increase the demand for health and social care services and will eventually provide more growth opportunities for investors in the healthcare industry.
Broadly speaking, the UK stock market industries will be full of surprises over the coming years, so expect the unexpected.
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[1] Organisation for Economic Co-operation and Development (2022, November). Confronting the Crisis: OECD Economic Outlook. https://www.oecd.org/economic-outlook/november-2022/[2] Posen, A.S. (2022, April 27). The UK and the global economy after Brexit. Peterson Institute for International Economics (PIIE). https://www.piie.com/research/piie-charts/uk-and-global-economy-after-brexit[3] Bank of England (2023, February 2). Why have interest rates in the UK gone up?https://tinyurl.com/msehx2ua
[4] London Stock Exchange (2023, February 3). FTSE All-Share. https://www.londonstockexchange.com/indices/ftse-all-share[5] https://www.londonstockexchange.com/[6] Office for National Statistics (2022, December)https://www.ons.gov.uk/peoplepopulationandcommunity/wellbeing/articles/theimpactofwinterpressuresonadultsingreatbritain/december2022#nhs-waiting-lists
[7] Gov.orghttps://www.gov.uk/government/news/uk-medicines-regulator-gives-approval-for-first-uk-covid-19-vaccine[8] Office for National Statistics (2021, March)https://www.ons.gov.uk/economy/grossdomesticproductgdp/bulletins/gdpmonthlyestimateuk/january2021
[9] Office for National Statistics (2021)https://www.ons.gov.uk/peoplepopulationandcommunity/birthsdeathsandmarriages/ageing