I have been wondering why certain stock market sectors have been falling for no very obvious reason of late. For example UK property companies and alternative energy funds. I suspect one reason is that the majority of UK listed shares are now held overseas – 56.3% at the last reported figures in May 2020 which was a record high.
The pound against the US Dollar has fallen by 14% in the last 3 months. So if you are an investor sitting in the US you will have seen your UK shares fall in price in your local currency by that amount. When shares are falling for no obvious reason, people tend to sell them – at least I know I do. So it’s quite likely that the UK market is being affected by US shareholders dumping their holdings as a defensive reaction to falling prices.
Some people have suggested that UK companies are being affected by the high inflation rate, by labour shortages, by higher interest rates, by logistic issues or a looming recession but in reality the reported results have been OK of late. Yes some companies might be directly affected by a falling pound – exporters positively and importers negatively. But there is no simple correlation with a company’s share price.
In reaction to the falling pound the Bank of England is buying UK bonds to calm the market. But they surely need to raise interest rates further and soon.
The rising proportion of UK listed companies held by overseas investors is exacerbating the bear market. Exchange rates can be very volatile and this makes for a very unhealthy stock market.
Roger Lawson (Twitter: https://twitter.com/RogerWLawson )
You can “follow” this blog by entering your email address below. You will then receive an email alerting you to new posts as they are added.