Oil and weaker pound to boost FTSE 100 in 2017
AJ Bell forecasts the FTSE 100 to end 2017 at 7,340
FTSE 100 could deliver total return of 10% next year
AJ Bell’s UK equity fund picks for 2017 – Equity Income, Value and All-cap
Russ Mould, investment director at AJ Bell, comments:
“Higher oil, cheap domestic plays (particularly the banks) and a weaker pound all provide a foundation for further gains in the FTSE 100 index for 2017. However, the UK’s leading benchmark is unlikely to march too high too fast due to the poor state of the nation’s finances, uncertainty over Brexit and a valuation that is full by historic standards.
“Reaching 7,340 would mean the index sets a new all-time high. It also represents an advance of around 6% from current levels. That might not sound like a lot but that gain would be supplemented by a dividend yield of around 4%, making for a 10% total return.
“That is a figure well beyond anything on offer from even the best cash accounts or ISAs and which also dwarfs the 1.49% yield currently on offer from 10-year UK Government bonds, although the stock market comes with the greater risk of loss than cash or bonds.
“The UK market has lagged its international peers for the past five years, on a total returns, sterling-denominated basis, not least because its reliance upon miners, oils, banks and insurers has been a handicap, not a help.
“With oil and industrial metals prices rising and the banks rallying amid hopes of improved economic momentum worldwide and a steeper yield curve, the heavyweight FTSE 100’s previously unpropitious mix could look more helpful in 2017.
“Between them, financials, oil & gas and mining stocks represent 44% of the FTSE 100’s market cap. According to consensus analysts’ forecasts, they are expected to provide
52% of 2017’s total FTSE 100 revenues of £1.7 trillion
48% of 2017’s total FTSE 100 profits
49% of 2017’s total FTSE 100 dividends
“Moreover, these sectors represent 76% of the growth in profits that is expected for 2017 and 52% of the expected growth in dividends for next year.
“Glencore is already talking about a resumption of dividend payments and confidence in Rio Tinto’s ability to return cash to shareholders is rising as iron ore prices remain firm. Meanwhile, oil’s surge beyond $55 a barrel will help dividend cover at oil giants BP and Shell and boost confidence that their respective forecast dividend payments of $0.40 and $1.88 will be safe once more.
Forecast percentage contribution to growth in 2017 | |||
| Pre-tax profits |
| Dividends paid |
Oil & Gas | 32% | Mining | 31% |
Mining | 30% | Financials | 22% |
Financials | 14% | Consumer Staples | 18% |
Consumer Staples | 9% | Consumer Discretionary | 12% |
Health Care | 6% | Industrial goods & services | 11% |
Consumer Discretionary | 4% | Telecoms | 2% |
Industrial goods & services | 3% | Utilities | 2% |
Telecoms | 2% | Health Care | 2% |
Utilities | 1% | Technology | 1% |
Technology | 0% | Real estate | 1% |
Real estate | 0% | Oil & Gas | -1% |
Source: Digital Look, analysts’ consensus forecasts
“The UK market overall trades very expensively relative to its history, although corporate profits also stand at a record high relative to GDP. Maintaining or increasing those profits would help to justify current stock market levels, or even fresh gains, but any drop in earnings could leave the market exposed on the downside.
“Rising US interest rates, rising Government bond yields, a rising dollar and a rising oil price must also be seen as potential threats, at least if they go a lot farther than expected. All could hit global growth and short-circuit the “reflation” trade which has become popular post the UK’s Brexit vote and the election of President Trump.
“Despite these risks, however, the UK’s 4%-plus dividend yield and the value opportunities potentially presented by the banks, insurers and other domestic facing plays do suggest the FTSE 100 has upside potential to offer in 2017.”
AJ Bell's UK equity fund picks for 2017
Ryan Hughes, head of fund selection at AJ Bell, comments:
UK Equity Income – Artemis Income
“Managed by the evergreen Adrian Frost, the Artemis Income Fund has successfully navigated its way through all manner of market conditions since Adrian took control in 2002. His experienced, but pragmatic approach has been a model of consistency that has rightly earned the plaudits and a look at his positioning points towards a potentially successful 2017. With around 30% in financials and top 10 positions for BP, Royal Dutch Shell and Lloyds and almost 75% in large cap companies, this fund could benefit if the FTSE 100 moves higher next year.”
UK Value – Jupiter UK Special Situations
“With ‘value’ strategies having been out of favour for so long, we’ve started to see the early signs of a switch in investor focus away from defensive companies towards highly unloved lowly valued companies. This plays nicely into the hands of Ben Whitmore, manager of the Jupiter UK Special Situations Fund who has forged a fantastic long term reputation of finding well run and financially sound businesses that other investors have shunned. With a patient approach and a comfort in investing away from the crowd, this strategy could do very well in 2017 as investors look away from the ‘expensive defensives’.”
UK All Cap – Old Mutual UK Alpha
“With investors seemingly becoming ever more short term, the patient approach followed by Richard Buxton is a throwback towards long term investing. Richard has been a strong advocate of the valuation opportunities in large cap UK equities for some time but it is only recently when this area of the market is once again being rewarded. With Royal Dutch Shell, BP and HSBC taking the top 3 largest positions, Richard sees clear value in the UK’s largest companies and will likely do well should the FTSE 100 enjoy a strong 2017.”