Europe Markets

Why UK assets remain resilient as England enters third national lockdown

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Key Points
  • The latest blow to the country's economic recovery from the coronavirus pandemic comes just as markets had begun to look more favorably upon U.K. assets in the wake of a last-minute trade deal with the European Union.
  • The U.K. has been blighted by the new highly transmissible variant of the virus in recent months.
A pedestrian wearing a face mask or covering due to the COVID-19 pandemic, walks in central London on December 23, 2020.
Tolga Akmen | AFP | Getty Images

The announcement of a new national lockdown in England initially sent 10-year U.K. gilt yields to a four-month low on Monday evening, but both equity and bond markets attempted to shrug off the latest economic setback during Tuesday morning trade.

Britain's large-cap FTSE 100 index was the standout performer among Europe's major bourses in early trade, but lost momentum to return to the flatline by around noon London time,. Other European indexes were ostensibly weighted down further by speculation of impending restrictions. Gilt yields rose across the board.

The latest blow to the country's economic recovery from the coronavirus pandemic comes just as markets had begun to look more favorably upon U.K. assets in the wake of a last-minute trade deal with the European Union.

Oliver Blackbourn, portfolio manager at Janus Henderson Investors, attributed the resilience of large cap U.K. equities to the overseas earnings effect from a weakening of sterling, which buoyed larger international firms. The euro was up 0.1% against the pound during late morning deals, although sterling held onto modest gains against the broadly depreciating U.S. dollar.

However, Blackbourn suggested the longer-term outlook was more uncertain.

"Even with the vaccinated promised land in sight, with one of the worst infection rates among developed nations and continued acceleration of new cases, the U.K. faces an unsettling period as it deals with a highly infectious variant of the Covid-19 virus."

The U.K. has been blighted by the new highly transmissible variant of the virus in recent months. To date, the country has recorded over 2.6 million cases of coronavirus and more than 75,000 related deaths, according to data compiled by Johns Hopkins University, with infection rates continuing to rise.

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AJ Bell Investment Director Russ Mould highlighted in a note Tuesday that many U.K. domestic businesses saw shares sell off on Monday as speculation began that Prime Minister Boris Johnson would announce a national lockdown in his evening speech, meaning some of the bad news was already priced in ahead of Tuesday's open.

"Nonetheless, given the severity of the lockdown restrictions announced by the Prime Minister, one might have expected a repeat of last year's trends with lockdown losers slumping on the stock market and beneficiaries rallying. That's not entirely the case this time round," Mould said.

Stocks like bakery chain Greggs and booking service Trainline declined on Monday ahead of an expected drop in consumer footfall and non-essential travel. Barclays shares pulled back initially as markets became wary of a rise in bad debts and interest rates remaining lower for longer, weighing on banking profits. However, Mould highlighted that these moves were minor compared to those seen early in 2020.

U.K. Finance Minister Rishi Sunak on Tuesday announced one-off grants of £9,000 ($12,229) to business in the leisure, retail and hospitality sectors, which prompted further gains in the FTSE 250. The midcap index was up 0.7% during morning trade, with the most lockdown-affected stocks clawing back some of Monday's losses.