The tectonic political shocks of the last two years have left UK equities feeling unloved. In US dollar terms, UK equities have returned -5% year-to-date, underperforming the majority of developed and major emerging markets (top-left chart). This is despite the economy proving remarkably resilient in the face of Brexit, with growth accelerating since the second half of 2017.

As a result, UK equities are worth a second look. During the global equity sell-off in February UK equities outperformed, with a lower drawdown and lower volatility (top-right chart). We highlight the FTSE 250 in particular, which not only outperformed the FTSE 100 during February, but has had both a higher average return and lower daily vol over the last 30 years (bottom-left chart). Moreover, given the correlation between the GBP real effective exchange rate and the FTSE250/ FTSE100 ratio (where the latter is more exposed to foreign currency movements; bottom-right chart) and the recent gains in sterling, the FTSE 250 has scope to further outperform the FTSE 100 in the coming months. The FTSE 250/FTSE 100 has seemed almost immune to the political ups and downs in the UK, with the ratio steadily rising from the beginning of 2017.

(Click on image to enlarge.)

Source: Bloomberg, Macrobond and Variant Perception