Lex Letter from London: a very royal rally

Dear readers,

Once a year, often in the spring, the Queen speaks to parliament to lay out her government’s legislative agenda for the government. Usually, this is a chance for a bit of pomp with a colourful carriage procession. But with Covid-19 still hanging around, and some unseasonably chilly weather, this year she coasted into Westminster in plainer style in the back of a Bentley.

Still, her government, led by Prime Minister Boris Johnson, is fired up. His Conservative party has done well in recent local elections. More importantly, the country’s vaccination programme has gone to plan.

As the lockdown winds down, Johnson can bask in the sunshine of his success. Never mind that he regularly fends off scandalous stories about undue corporate influence from financiers such as Lex Greensill, or Brexiter industrialists such as Sir James Dyson.

So bullish is Johnson, and so seemingly bulletproof, that his government hopes to pass a bill ending the five-year term limit introduced by David Cameron’s earlier Conservative government.

Johnson’s greatest triumph may come later if Brexit does not end up freezing the UK out of trade with its largest partners, the EU and US.

Signals are mixed so far, though those in industries such as fishing and finance might disagree. Skirmishes with French fishermen have already begun, forcing the UK navy to patrol waters off the Channel Island of Jersey.

At the other end of those scales, the City has had to put up with the loss of trading of equities and derivatives to European exchanges. Lex has written about the woeful neglect of financial services by a pro-Brexit government. We have even wondered what a post-Brexit City might look like. Even so, that disregard has done nothing to halt the bull run in UK-listed equities in recent months.

The UK FTSE 350 index has left its World counterpart behind in the past three months. A long-running rally in the shares of technology and online commerce companies in the US and Asia had left the UK market trailing, unable to attract many initial public offerings. Although the government has offered strategies to encourage more technology companies to list here, valuations and investor demand have generally been higher in the US.

But as leading economies get set to restart after a year of hibernation, punters have turned their attention to those companies that could benefit. Commodities and industrial manufacturers have surged. As developed stock markets go, the UK has a fair few of these companies listed.

Mining and energy producers make up a fifth of the 350 index, double that of FTSE World. Add in industrials and the proportion jumps to almost a third. At the same time, UK equities look to be at their cheapest in a decade relative to all other markets. This year, Lex thinks that discount will finally unwind.

For the City’s sake, let’s hope so. Enjoy the rest of your week,

Alan Livsey
Lex Research Editor