How has the UK stock market performed in the first half of 2023?

After a strong start to the year, UK markets have fallen amid concerns about the impact of stubbornly high inflation and expectations of further rises in key interest rates.

The FTSE All-Share Index is down 4 percent since January, as has the FTSE 100, which had started the year on a bull run of sorts.

The blue chip index had passed the 8,000 mark but is now trading below pre-pandemic levels at around 7,300.

The FTSE 250, which has a greater concentration of domestically-focused stocks, is down 5.4 percent, a further sign that the fate of the UK economy is worrying investors.

Certain sectors have outperformed others as concerns about inflation and recession drive investors into more defensive stocks, but concerns about the health of the London IPO market have done little to ease the concerns.

Why is the UK market so unloved?

There is an ongoing story about how the UK market is not loved by investors despite being relatively cheap compared to other global markets.

At the start of the year, the FTSE 100 continued its good performance from 2022. The composition of the index, which is heavily weighted towards large-cap energy and banking stocks, helped push it higher as interest in growth stocks waned.

So what has happened since then? Markets are now pricing the Bank of England’s base rate to peak at 6.5% by the end of 2023, adding further pain to many borrowers.

JP Morgan recently warned that rates could go even higher if inflation is more stubborn than expected – peaking at 7 percent.

Allan Monks, an economist at JP Morgan, has warned that the bank could be forced to raise its base rate to 7 percent if inflation remains stubbornly high for longer than expected. The Consumer Price Index rose 8.7 percent in the 12 months to April 2023.

A recent memorandum from Liberum said: ‘This excessive pessimism about inflation and monetary policy in the UK has a firm grip on UK stock markets… the more interest rate hikes are priced in, the more pressure on equity markets.

“This has been the leading story of UK stock markets all year, with the exception of the March setback in the aftermath of the US regional bank crisis and the collapse of Credit Suisse.”

Laith Khalaf, head of investment analysis at AJ Bell, said: ‘It hasn’t been a great year for the UK stock market so far, with the FTSE 100 falling about 4%. Mid and small caps are down about 5 percent, so there was no hiding place further up the cap scale.

The UK is currently wracked by a sticky inflation problem that is weighing on businesses and consumers and undermining investor confidence. The political instability of the past year doesn’t help either, especially with the approaching elections that cause even more fear, uncertainty and doubt.’

Which sectors have done well?

Since January, the total return of the FTSE All Share Index has been positive at +2.6 percent, but there is some difference between sectors.

“Larger, more internationally oriented companies – less exposed to concerns about the health of the domestic economy – fared much better than medium and smaller companies,” said Jason Hollands, CEO of Bestinvest.

The FTSE 100 posted +3.2 percent in the first half, ahead of the FTSE 250 which returned 0.6 percent. The Numis smaller companies ex. The Investment Companies Index returned 1.4 percent.

The financial sector, which makes up about 23 percent of the UK market, returned 6 percent and bank stocks are up 13.6 percent since the collapse of US specialist lender Silicon Valley Bank.

As the BoE continues to raise interest rates, concerns about mounting losses and bad loans are leaving some banks unable to recover losses.

Lloyds is currently down 8.4 percent since January, while Natwest Group is down 13.5 percent.

The industrial sector, about 11.9 percent of the market, posted a strong return of 12.3 percent.

However, other major sectors posted disappointing returns this year, including health care (+1.7 percent), oil and gas (0.6 percent) and basic materials, which are down 16 percent.

‘At the cutting edge, tobacco stocks had a hard time, with a negative total return of -17.7 percent,’ says Hollands. British American Tobacco has seen its shares fall -22% year-to-date and Imperial Brands is down -16%.

“Valuations are cheap and dividend yields are high, but fundamentals have deteriorated as cigarette sales volumes fall and e-cigarette growth slows as the health risks of vaping gain more attention.”

Where do investors put their money?

Despite the mixed market performance this year and the difficult economic situation, investors appear to be supportive of UK equities.

Data from AJ Bell shows that financial stocks are among the most popular stocks on his platform, with Legal & General, Lloyds and Aviva making the top three stocks this year.

British American Tobacco also remains popular despite underperforming, and surprisingly Rolls-Royce, the top performer of the FTSE, is not missing.

Khalaf said: ‘Equity traders are quite focused on the UK, with Tesla being the only foreign stock to make the top ten.

The UK stock market is undoubtedly a great place to reap dividends, and that might go some way to explaining why stock traders like to keep their money on the London Stock Exchange. In fact, the most popular UK stocks bought in the past six months fit seamlessly into an income portfolio.”

Similar names also appear in Freetrade’s list of the most bought UK stocks in the first half of the year. Glencore takes the number one spot, despite shares falling nearly 20 percent, followed by Legal & General and Barclays.

However, the platform’s top stock is Tesla, which remains a favorite of DIY enthusiasts. Despite a sharp sell-off last year, shares of the electric vehicle maker are up 148 percent.

Nvidia has also been a popular choice for investors after the AI ​​stock joined the trillion dollar club last month. Shares are up 194 percent since January.