The FTSE 100 has recorded nine consecutive closing highs and the natural question for investors is whether this progress can be maintained.
Here Russ Mould, AJ Bell's Investment Director looks at:
- The four sectors that are likely to define the FTSE 100 progress during 2017
- What exposure top performing funds have to these sectors
To judge whether the FTSE 100 will extend its winning streak it is necessary to look at the index’s make-up and which sectors and stocks wield the greatest influence, both in terms of their market capitalisation and their contribution to the benchmark’s aggregate profits and dividend payments.
Investors need to keep their eyes on four key sectors, or groupings of stocks which represent 45% of the FTSE 100 by market cap:
- Insurers (life and non-life)
- Oil & Gas Producers
An aggregate of bottom-up analysts’ consensus forecasts shows that this quartet (with banks and insurers bracketed together in the ‘financials’ bucket, are forecast to provide 48% of total profit and 50% of total dividend payments in 2017.
|Percentage of profits||2017 E||Percentage of dividends||2017 E|
|Financials||23%||Oil & Gas||25%|
|Oil & Gas||15%||Financials||22%|
|Consumer Staples||15%||Consumer Staples||11%|
|Consumer Discretionary||11%||Health Care||10%|
|Health Care||9%||Industrial goods & services||7%|
|Industrial goods & services||9%||Telecoms||7%|
|Real estate||1%||Real estate||1%|
Source: Thomson Reuters Datastream
However, this quartet’s influence looks all the more potent when their contribution to growth in earnings and dividends is assessed. In this case, they are forecast to provide 76% of the anticipated £48.7 billion increase in FTSE 100 pre-tax profits and 52% of the projected increase in dividends (where oil and gas is seen making a negligible contribution).“Some investors may feel more comfortable with this mix than others, given that all four generally disappointed shareholders in 2014 and 2015 before roaring back into fashion in 2016.
|Percentage of profits growth||2017 E||Percentage of dividend growth||2017 E|
|Oil & Gas||32%||Mining||31%|
|Consumer Staples||9%||Consumer Discretionary||12%|
|Health Care||6%||Industrial goods & services||11%|
|Industrial goods & services||3%||Utilities||2%|
|Real estate||0%||Oil & Gas||-1%|
Source: Thomson Reuters Datastream
For the FTSE 100 to perform strongly in 2017, these areas all need to deliver the profit and dividends expected of them. All four are suited by the market’s current preferred narrative, namely that economic growth and inflation will accelerate in 2017, thanks to a shift from austerity to fiscal stimulus, particularly in the USA under President Trump but also potentially in Japan, Canada, the UK and others. If this scenario pans out as expected, then the dollar, oil, metals prices and Government bond yields could all rise, to the potential benefit of the key mining, oils, banks and insurance sectors.
If that agenda gets blocked, or fails to generate the expected improved momentum, then there could be trouble ahead. Weaker-than-expected growth could hit metals and oil prices and persuade central banks to keep interest rates lower for longer, exerting some gravitational pull on bond yields, to the potential detriment to the four key sectors, to varying degrees.
Analysis of the top 10 performing large cap UK equity funds over the past five years shows that all of them have significant exposure to these sectors ranging from 61% to 31%. In total the financials, oils and miners represent 45% of the FTSE 100 by market cap - breaking down as 22%, 15% and 8% respectively.
|Annualised five-year performance||Sector weighting|
|Investec UK Alpha||15.60%||17%||8%||11%||35%|
|Majedie UK Focus||15.20%||30%||19%||13%||61%|
|Ardevora UK Equity||14.50%||19%||6%||7%||32%|
|Invesco UK Equity||14.20%||30%||15%||4%||49%|
|Lazard UK Omega Retail||14.00%||27%||16%||13%||55%|
|Jupiter UK Growth||13.80%||27%||0%||4%||31%|
|Barclays UK Alpha||13.20%||24%||12%||10%||46%|
|RWC UK Focus||13.20%||31%||12%||12%||55%|
|Majedie UK Equity||13.10%||21%||19%||15%||55%|
|Threadneedle UK Extended Alpha||13.10%||18%||7%||7%||32%|
Source: Morningstar, for UK Large-Cap Blend Equity category.
Where more than one class of fund features only the best performer is listed.
These articles are for information purposes only and are not a personal recommendation or advice.