Can the FTSE 100 extend its winning streak?

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:

  • Banks
  • Insurers (life and non-life)
  • Mining
  • 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%
Mining 10% Consumer Discretionary 9%
Health Care 9% Industrial goods & services 7%
Industrial goods & services 9% Telecoms 7%
Telecoms 4% Utilities 5%
Utilities 4% Mining 3%
Real estate 1% Real estate 1%
Technology 0% Technology 0%

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%
Mining 30% Financials 22%
Financials 14% Consumer Staples 17%
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: 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.

Fund exposure

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  
    Financials Oils Mining TOTAL
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.