The FTSE in 2017: six charts that tell the story so far
The UK stockmarket rose in the first half of 2017 in the face of political and economic uncertainty. We look at why and what the future may bring.
The FTSE 100, 250 and All-Share indices have all made strong gains and reached record highs in the first half of 2017.
The strong performance of London-listed shares is somewhat surprising given the backdrop – June’s snap general election arguably left the government in a weaker position going into Brexit negotiations, while household finances are being squeezed by higher inflation. There also renewed fears of higher interest rates in 2018.
But the international nature of the UK stockmarket means global factors have imposed a greater influence. Some confidence remains that spending plans in the US and China will drive world economic growth while greater political stability in Europe has been encouraging. America’s S&P 500 rose by 9.3% in the first half of the year while the Eurostoxx 50 was up by 7.4%.
Those rallies helped drag UK shares higher.
Despite a sluggish start to 2017, the FTSE 250 rose 7% in the six months to 30 June 2017, outperforming a 3.3% rise on the FTSE All-Share and 2.4% gain for the FTSE 100.
This was despite sterling rising over that period. A strengthening currency is usually bad for UK stockmarket values.
A weaker pound means money made abroad is worth more once converted back into sterling. It also makes companies listed on the FTSE potential takeover targets (M&A). Investors’ "will to deal" was most evident in the first quarter when global M&A volume hit its second highest on record.
The pound, which tumbled after Brexit a year ago, was weak at the start of 2017 but managed a modest recovery into the summer months.
It should be noted that around 70% of the FTSE 100’s revenues come from abroad, compared with 50% for the FTSE 250. This helps explain the difference in performance between the two indices. The very different makeup of each index also has an affect. We explain this below.
- Explainer: how currencies affect the way markets move
The charts below show the movement of the pound versus the dollar over the past year and a comparison of the FTSE indices, rebased to 100.
The rise and fall of sterling in 12 months
GBP vs USD
Source: Schroders, Bloomberg data as at 19 July 2017. For information purposes only. Please remember that past performance is not a guide to future performance and may not be repeated.
How the FTSE indices have performed since December 2016
Index level rebased to 100
Source: Schroders, Thomson Reuters Datastream. FTSE total return levels taken at the end of each month between December 2016 and June 2017. The indices have been rebased to 100 to show a true comparison. Returns adjusted for 2.9% inflation. For information purposes only. Please remember that past performance is not a guide to future performance and may not be repeated.
The sectors that performed best (and worst)
The performance of the headline indices fail to tell the full story. The movements of the sectors reveal far more.
The makers of consumer goods, a sector that has performed remarkably well in the past decade, were the top performers. The sector had a strong first quarter which helped it return 13.9%, including dividends, in the first half of 2017.
Nearly all of those gains came in the first quarter, as the chart shows. The second quarter was less positive as fears grew about consumer spending. UK retail sales slowed in May by their most in four years.
Industrials, financials and tech stocks made consistent gains. The sectors were up 10.4%, 9.4% and 9.1%, respectively, in the six months to end-June.
Energy and materials continued to underperform. An oil supply glut and huge production of shale gas in the US continued to supress the oil price. While hopes remain that China and the US can implement huge spending plans, investors appear keen not to get too carried away the sectors that will most likely benefit.
Utilities fell too. The potential for interest rate rises contributed to their underperformance. Interest rate rises can affect utilities in two ways; by raising their debt costs and eroding the value of the dividends they pay.
FTSE All-share sector returns for 2017
Sector % returns in Q1, Q2 and H1
Source: Schroders, Thomson Reuters Datastream as at 30 June 2017. Data shows sector total returns which includes dividends. Figures are rounded to the nearest decimal point so totals may not match. For information purposes only. The material is not intended to provide advice of any kind. Information herein is believed to be reliable but Schroders does not warrant its completeness or accuracy. Past performance is not a guide to future performance and may not be repeated.
Why the FTSE 250 outperformed the FTSE 100
The make-up of the FTSE 100 and 250 are a very different in terms of the sectors within them.
The graph below illustrates the sector or industry “weightings” for each.
For example, the FTSE 100 is more heavily weighted towards energy (oil & gas) and materials (miners among them), both of which had a relatively weak first half of 2017.
The FTSE 250 has a much stronger weighting towards industrials and technology stocks, which performed better in the first six months of the year, and a lesser weighting towards energy and materials.
A good earnings season and policies where companies’ dividends are expected to rise at least in line with earnings have also helped the mid caps outperform their larger peers.
Why the FTSE 250 outperformed the FTSE 100 in H1 2017
Sector weightings %
Source: Schroders, Bloomberg as at 30 June 2017. Sectors defined by Bloomberg at the GICS (Global Industry Classification Sector) sector level. For information purposes only. The material is not intended to provide advice of any kind. Information herein is believed to be reliable but Schroders does not warrant its completeness or accuracy.
What happened to valuations?
There are five key tests investors should consider before deciding where to invest their money (Explainer: How cheap are world stockmarkets: five key tests).
Using the data made available to us from Thomson Reuters, we examined how FTSE 100, 250 and All-Share valuations have changed over the last six months and how they now compare historically on three of the five valuations.
The trailing price-to-earnings ratio (P/E) for the FTSE 100 and All-Share fell by 14.3% and 9.3%, respectively, during first-half 2017. It suggests they have become cheaper. Meanwhile, the FTSE 250 trailing P/E rose by 10.4%.
The trailing P/E compares a stockmarket’s value or price with the aggregate earnings of all the companies over the past 12 months. A low number represents better value. One drawback is that the figure is based on previous rather than future performance.
On a cyclically-adjusted price to earnings multiple (CAPE) all the FTSE indices rose by 6.9% or more. In other words, they all became more expensive on this measure.
CAPE compares the stockmarket’s value or price with average earnings over the past 10 years, with those profits adjusted for inflation. This smooths out short-term fluctuations in earnings.#
When the CAPE is high, subsequent long- term returns are typically poor. One drawback is that it is a dreadful predictor of turning points in markets.
Dividend yields (DY) on the FTSE 100 and All-Share rose by 5.2% and 4%, respectively, suggesting better value today than six months ago. But the yield on the FTSE 250 fell by 0.4%. A low yield has been associated with poorer future returns.
How the FTSE's valuations have changed since December 2016
|Index||Index (6-month change)||CAPE (6-month change)||P/E (6-month change)||DY (6-month change)|
|FTSE 100||7,312.72 (2.4%)||15.5 (6.9%)||28.9 (-14.3%)||3.8 (5.2%)|
|FTSE 250||19,340.15 (7.0%)||25.7 (8.4%)||22.2 (10.4%)||2.7 (-0.40%)|
|FTSE All-share||4,002.18 (3.3%)||17.0 (8.2%)||27.5 (-9.3%)||3.6 (4.0%)|
Source: Schroders, Thomson Reuters Datastream as at 30 June 2017. Percentage change shown in brackets is for the period 31 December 2016 to 30 June 2017. For information purposes only. Please remember that past performance is not a guide to future performance and may not be repeated.
How do valuations compare historically?
On both CAPE and P/E all three indexes appear expensive relative to their historic valuations, although that does not necessarily mean that the indices can’t go higher. For example, if earnings improve those valuations now might not seem so high in the future.
Dividend yields are still attractive to investors looking for income from their investments. Interest rates remain at historic lows and UK 10-year government bonds (known as “gilts”) currently yield 0.9%.
However, given the high valuations investors should be aware that they might be paying more for those dividend yields than they would have in the past.
How the FTSE's valuations compare historically
|Index||CAPE (14-yr avg)||P/E (14-yr avg)||DY (14-yr avg)|
|FTSE 100||15.5 (13.7)||29.2 (12.6)||3.8 (3.5)|
|FTSE 250||25.7 (23.3)||22.4 (18.5)||2.7 (2.7)|
|FTSE All-share||17.0 (14.9)||27.7 (13.5)||3.6 (3.3)|
Source: Schroders, Thomson Reuters Datastream as at 30 June 2017. For information purposes only. Please remember that past performance is not a guide to future performance and may not be repeated.
View from the fund manager: David Docherty, UK Equity Fund Manager, said:
“The "Goldilocks" economic scenario, which has been "not too hot, not too cold" with moderate growth, low inflation and supportive monetary policy, has supported the UK and other stockmarkets for some time now.”
"While this environment may well continue, turbulence is possible if any of the Goldilocks preconditions such as globally loose monetary policy are questioned by markets.”
“If this were to happen, we would view market volatility as an opportunity to identify value and this could lie within derated consumer cyclical sectors which have been heavily influenced by the fluctuations of sterling against other currencies.”
Past performance is not a guide to future performance and may not be repeated. The value of investments and the income from them may go down as well as up and investors may not get back the amounts originally invested.
The opinions contained herein are those of the author and do not necessarily represent the house view. This document is intended to be for information purposes only. The material is not intended as an offer or solicitation for the purchase or sale of any financial instrument. The material is not intended to provide, and should not be relied on for, accounting, legal or tax advice, or investment recommendations. Information herein is believed to be reliable but Cazenove Capital does not warrant its completeness or accuracy. No responsibility can be accepted for errors of fact or opinion. This does not exclude or restrict any duty or liability that Cazenove Capital has to its customers under the Financial Services and Markets Act 2000 (as amended from time to time) or any other regulatory system. Cazenove Capital is part of the Schroder Group and a trading name of Schroder & Co. Limited 12 Moorgate, London, EC2R 6DA. Authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority. For your security, communications may be taped and monitored.