The froth is finally showing signs of curdling on Wall Street. As American equities wobble under the weight of overvaluation fears, London’s FTSE 100 has staged a modest rally, positioning itself as the cautious investor’s bolt-hole. The divergence is stark: the S&P 500 has shed 2.3% in early trading, while London’s blue-chip index nudged up 0.8% by midday. This is not a flight to quality in the traditional sense. It is a flight from fantasy.
For years, the message from the City has been that American markets are pricing in a utopia that fiscal and monetary reality cannot sustain. Now, the cracks are appearing. The tech-heavy Nasdaq has fallen 3.1% as investors reassess the earnings prospects of companies trading at multiples that would make a Victorian speculator blush. The trigger? A hotter-than-expected US inflation print that has reignited fears of the Federal Reserve keeping rates higher for longer. When the cheap money dries up, the castles in the air tend to collapse.
London, by contrast, offers something that has become increasingly rare: actual value. The FTSE 100 trades at a forward price-to-earnings ratio of around 11, roughly half that of the S&P 500. For yield-starved pension funds and institutional investors, the attraction is obvious. British equities are loaded with cash-generative businesses in energy, mining, and defensive consumer staples. They may not offer the sexiness of a Silicon Valley start-up, but they do offer dividends. And in a world where central banks are still grappling with inflation, dividends are the new alpha.
Gilt yields have also played their part. The 10-year gilt yield has stabilised around 4.2%, providing a decent risk-free return that draws capital away from speculative equities. Meanwhile, the dollar is showing signs of weakness against sterling, making London-listed assets cheaper for international buyers. The currency tailwind is a welcome bonus for a market that has long been derided as boring. But boring is beautiful when the alternative is a crash.
The question is whether this is a genuine rotation or just a temporary reprieve. I suspect the latter. London’s rally is built on sand in the sense that it depends on the global economy avoiding a hard landing. If American inflation proves sticky and the Fed is forced to tighten further, the ripple effects will hit the UK. Our own inflation is still above target, and the Bank of England has its own tightening to do. The market is pricing in a 50 basis point hike at the next meeting. That will squeeze corporate margins and consumer spending, making today’s rally look like a dead cat bounce.
Capital flight is the term du jour, but let us be precise. What we are seeing is not a wholesale exodus from American markets. It is a tactical repositioning. The big money is moving to the sidelines, not to London. Cash is king again. And for those who are buying, they are buying hedges. Options activity on the FTSE 100 shows elevated put buying, suggesting that even the bulls are nervous.
Still, for the moment, London is the least ugly horse in the race. The oil and gas majors are benefitting from elevated energy prices, and the mining giants are riding the commodity supercycle. These are real assets in a world of fiat money and fiscal profligacy. If you believe, as I do, that the era of easy money is over and that inflation will remain stickier than the central banks admit, then heavy industry and hard assets are the place to be. London has them in spades.
The real test will come when the earnings season kicks off next week. If British companies can deliver on profit margins and guidance, the safe harbour narrative will have legs. If not, we will be back to the same old story: London as a value trap. For now, I am watching the gilt curve and the dollar index. The bottom line is this: the American bubble is deflating, but London is no paradise. It is merely a less dreadful option. And in this market, that is enough to generate a rally.
