However, there was a huge divergence between the best performer, Mexican silver miner Fresnillo up 28%, and the worst, retailer Next down 18%. Russ Mould, investment director at AJ Bell looks at the leaders and laggards during the FTSE 100 record winning streak:
Looking at the list of the 10 best performers (see table below), three themes emerge.
First, companies with a lot of assets overseas, or who do a lot of business outside the UK, are prominent – this includes the miners in particular, such as Fresnillo, BHP Billiton and Anglo American. This is due to the ongoing weakness of the pound which increases the value of their foreign profits and assets.
Second, some domestically-focused names appear, which suggests investors are taking comfort from the improvement in economic data from the UK, as purchasing managers indices rise, unemployment falls and retail sales remain robust. This is helping Persimmon, Taylor Wimpey and Whitbread for example. Whitbread may even be benefiting from the lower pound as well, as sterling’s slide attracts more tourists to its hotels in the UK.
Third, none of these stocks offers particularly reliable or stable earnings and none really fit the bill of “expensive defensives” or “quality growth.” Instead, they are all generally cyclicals, companies sensitive to an upturn in economic activity. In the wake of the EU referendum vote, the Italian referendum and the US election, politicians have begun to talk less about austerity and more about infrastructure spending and economic stimulus, to keep or earn their own jobs as well as save those of others. This means investors have switched to these cyclical, turnaround stocks which would benefit from faster growth – and if growth is about to become more plentiful (and at the moment, that’s just a hope or view, not a certainty) then there is no need to pay a big premium for growth from stocks like Unilever, Diageo, Reckitt, the drug giants or the utilities, whose absence from this list is very apparent.
Looking at this list of laggards, there are a lot of company specific situations here, although the presence of ABF (Primark), Next and M&S shows that some residual concerns remain about the sustainability of consumer spending, the imminent invocation of Article 50 and also the surge in consumer credit; November’s £1.9 billion increase was the highest monthly leap in borrowing since 2005, which begs the question of how long the pre-Xmas splurge can last.
The presence of the Real Estate Investment Trust (REITs) British Land and Land Securities also speaks loudly of nerves about what Brexit may mean for the UK economy, as these firms act as landlords for leading financial services firms and retailers.
There are also stocks which may have their own cyclical or structural challenges. It is unfortunate that Boeing and Airbus are both talking less optimistically about their order books and the aircraft cycle just as Rolls-Royce seeks to drive through a major restructuring programme.
Meanwhile, Standard Life has been held back by analysts’ fears over the performance of its GARS (global absolute return strategies) fund, where fund outflows had started to gather pace. Perhaps the full-year results on 24 February will calm nerves after a better December from the flagship fund.
Pearson is still trying to fight its way back from a couple of big profit warnings and CEO John Fallon’s admission that the company is to leave its dividend unchanged, ending a long run of increases in the shareholder payout. First-half sales fell 7% on an underlying basis, hampered by a slowdown in the number of students enrolling for higher education in the US and lower book sales and rentals. The latter issue is perhaps the biggest threat to Pearson and Open Education Resources (OER), whereby universities make best-of-breed lecturing and educational materials freely available, so other students and lecturers can copy, use, append and even modify the documents, and cut down on the expense of buying or renting the sort of textbooks provided by Pearson. If the slowdown is a cyclical blip, Pearson could bounce back. If OER starts to devour its lunch, talk of “structural decline” could start to swirl, further pressuring the stock.
Change in share price 21 December 2016 - 13 January 2017
Smurfit Kappa Group
Land Securities Group
British Land Co
Royal Bank of Scotland Group
Direct Line Insurance Group
Associated British Foods
Marks & Spencer Group
Source: Sharepad, Bloomberg