Since October last year, the currency-related Invesco CurrencyShares British Pound Sterling (NYSEArca: FXB) has grown by 5.6%, while the iShares MSCI United Kingdom ETF (NYSEArca: EWU) climbed by a whopping 27%.
The FTSE 100 (UKX) has grown by about 8% since December in dollar terms and has outperformed the S&P 500, the MSCI World, and the Euro Stoxx, despite the UK being one of the worst-hit nations by the COVID-19 pandemic.
Also, the FTSE 100 maintains a steep discount compared with other markets, with a forward price to earnings ratio of 15x. Meanwhile, the Euro Stoxx index and the SPX trade at over 18x and 23x, respectively.
In other news, the UK has successfully reached an agreement on its trade deal with the EU, eliminating previous uncertainty-induced price action. However, there’s still much to be discussed.
That said, as more investors flood back into British markets, many believe that the GBP could benefit significantly from the influx in demand for UK-based assets.
The Chief Economist at Toscafund Asset Management, Savvas Savouri, noted that the GBP’s fundamental value in euro is around €1.30 apiece, but remained depressed around €1.12 on Wednesday due to accumulated fears that Brexit would be costly and messy.
Savouri noted that “at some point, there will be a big transaction that will make FX traders wake up and realize the pound is undervalued,” adding that “we’ve gone through the quagmire of political uncertainty in a way that the U.S. and other European countries haven’t yet” in a recent interview with the Wall Street Journal.
In other news, CNN reported overnight that President-elect Joe Biden was considering distributing another stimulus package as large as $2 trillion. This should provide a significant boost to equity markets, including the FTSE.
However, strong gains in the index will likely get frustrated as European governments tighten coronavirus lockdown restrictions, as fears about the fast-spreading new COVID-19 strain first discovered in the UK.
Meanwhile, Italy—whose government is on the cusp of a collapse as political tensions heighten—plans to extend its COVID-19 restrictions to the end of April. The Netherlands plans to also extend its lockdown by at least three weeks, while France considers extending its nationwide-imposed curfew.
These are the factors currently driving the price dynamics in the FTSE 100 in the near and medium-term.
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