The FTSE 100 closed 2016 at a record high following a six-month surge, but the economy remains shaky. So, what does this mean for your investments?
As the nation rang in the New Year the FTSE 100 sat at a record high, finishing 2016 up 14.43%. The measure of the UK’s biggest companies has enjoyed six months of growth since it crashed in the wake of the Brexit vote back in June.
Usually, such strong stock market performance would be accompanied by bullish prediction for the economy but 2017 economic predictions don’t make for enjoyable reading. A survey by the Financial Times found that most economists expect economic growth to slow in 2017. So, why is the stock market so out of kilter with the economy?
The key thing to understand here is that many of the companies – 70% in fact – that make up the FTSE 100 trade in many markets beyond the UK. This means the plunging pound has been hugely advantageous for them – boosting their earnings and helping with their share prices.
The stock market has also been boosted by the election of Donald Trump as the next US president. His politics may be difficult to make sense of but his economic stance is clear, he intends to pour money into the US economy which should have a knock on effect on world markets.
This means shares in the US have soared, and many believe the good fortune will spread around the world meaning a boost to FTSE 100 shares with international interests.
“2016 has been a year of unexpected political events and volatile markets,” says Richard Stone, chief executive of The Share Centre. “However, the stock market has put those political shocks behind it and ended the year with confidence in reaching new all-time highs. This is a sign of confidence in the future prospects of companies which make up the index, their ability to grow profits and deliver dividends with capital returns to investors.”
Will it last?
But, as we all know past performance is no guide to future performance, so just because 2016 was a good year for the FTSE 100, doesn’t mean 2017 will be too. However, several experts are suggesting we could see the FTSE continue to rise.
[SPOTLIGHT]“In the last 30 years the stock market has not posted a single year of gains with losses in the years either side,” says Stone. “History would suggest that following a rise in 2016 breaking two years of losses in 2014 and 2015, 2017 may be another positive year for the market.”
Stone goes on to point out that there are several positive influences on the market this year.
“With the overseas earnings of FTSE 100 companies supported by weak Sterling, with fiscal loosening in the US and the UK following respective votes in 2016, and with low interest rates, there are a number of reasons why investors may look optimistically into 2017.”
Stone isn’t alone in thinking 2017 could be a good year for the UK stock market.
“The growth outlook is positive on both sides of the Atlantic and bond yields continue to rise modestly. This will make equities more interesting than bonds and valuations are not excessive. Offsetting that, 2017 will be a year of significant political uncertainty in Europe, including the UK. The post-2009 bull market is long in the tooth but I expect it to continue this year,” says Tom Stevenson, investment director for personal investing at Fidelity International.
Where to look for growth
So, which sectors and stocks should you be taking a look at? So far banks and commodities have continued their strong performance from 2016, but if you aren’t already invested you may have missed the boat.
“Strong upward trends for banks and miners were strongly supportive for investors last year, but it is a much harder call to suggest that they will sustain their relentless progress deep into the new year,” says Rebecca O’Keefe, head of investment at Interactive Investor.
The banking sector has enjoyed a good run thanks to rising bond yields, while commodity firms have benefitted from a stronger oil price.
One stock that has got off to a strong start in 2017 is InterContinental Hotels which has enjoyed an upgrade from Barclays, which said the stock was “the best play in the sector on a potential rebound in US growth as well as potential tax cuts.”
The weakness of the pound also boosts the firm’s earnings, which are in dollars.
Another stock benefitting from the weak pound is Diageo, the owner of the Smirnoff, Baileys and Johnnie Walker drinks brands. The company only generates 10% of its revenue in the UK so its earning power is boosted by weak sterling. The company may also benefit from increased sales during these uncertain political times, according to some analysts.
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