Inflation rose and belts tightened but markets’ bull run charged on
Tom Rees sketches a year when the FTSE was outshone and looks at what we can expect in 2018
While global stocks have climbed to multiple record highs in 2017 on a wave of bullish exuberance, the FTSE 100 has lagged far behind its surging peers.
The UK’S benchmark index climbed just 7.6pc in 2017, while the buoyant Dow Jones in the US soared 26pc.
Greater uncertainty surrounding Britain’s economic outlook has made it the “ugly duckling of the major markets”, JP Morgan Asset Management market strategist Mike Bell argues.
Despite sliding consumer confidence and households tightening their belts amid rising prices, the FTSE 250 has outperformed its bigger brother, even with its more domestically leaning firms, rising 15pc in 2017.
The economy’s resilience in the face of widespread apocalyptic post-brexit predictions has helped mid-cap stocks claw back ground lost in the immediate aftermath of the Brexit vote, Mr Bell says.
The rebound of sterling hasn’t been strong enough to curb rising inflation, which has ramped up the pressure on Britain’s high street. Costly imports from the pound’s depreciation have pushed CPI up to 3.1pc, while wage growth remains stubbornly subdued despite a tightening labour market.
Squeezed UK household incomes have passed on the pressure to the UK’S retailers, which are already feeling the heat from the march of internet shopping.
While inflation-proof bargain stores such as Primark and B&M have bucked the trend, shoppers under the cosh from negative real wage growth have stayed away from the high street. However, plastic gaming figurine retailer Games Workshop, the best-performing stock on London’s main market in 2017, offers a glimmer of hope. The Nottinghambased retailer has embraced the shift online by launching apps, and bumped up its international exposure, sending its shares soaring 275pc in 2017.
London’s other struggling sector this year, outsourcing and support services, has suffered a string of profit warnings. Paper-thin margins exposed by mispriced contracts have driven share prices into the ground. The valuation of HS2 and Ministry of Defence contractor Carillion fell by an eye-watering 93pc.
Three major European airlines went bust in 2017, pointing to another miserable year for many of those in the sector.
However, the survivors have had a year to remember. British Airways owner IAG and easyjet have rebounded 47pc and 43pc, respectively, while Central and Eastern European carrier Wizz Air has seen its valuation double to £3.7bn. However, Ryanair has seen its momentum fizzle out as pilot union disputes finally came to a head.
Commodity stocks experienced a resurrection following a grim 2016. The FTSE 100’s mega miners and oil majors bounced back on recovering prices. After sinking in 2016, copper prices rallied to a four-year high as demand climbed in Asian powerhouse China, and the electric car revolution promises increased demand.
With Brexit uncertainty only slightly dampened by December’s breakthrough deal, and the Bank of England having made just one tiny step on the road to tighter monetary policy, the pound’s continued volatility could remain the FTSE 100’s key driver in 2018. The central bank has warned investors that more rate rises will arrive at a “gradual pace” and to “a limited extent”.
Although a little long in the tooth at nine years old, the bull run on equity markets is showing no signs of letting up in 2018.
The fundamentals suggest that stocks and their dizzyingly high valuations are not in bubble territory but are being lifted higher by “rational exuberance”, according to IG market analyst Chris Beauchamp.
He adds that the bull run is likely to be supported by strong earnings, a stable economic backdrop and monetary policy remaining relatively accommodative, despite the Fed stepping up its tightening cycle.
Stocks in Europe, which have struggled to keep pace with their soaring peers across the Atlantic, could strengthen if the euro begins to weaken amid slightly cooling growth in the eurozone, and hesitancy at the ECB over tapering plans as sluggish inflation continues to linger in policymakers’ minds.
But Mr Bell warns that “we are now nine years into an economic cycle that in the post-war period has never lasted more than 10”, adding that small and mid-cap stocks are at the most risk when markets are on the decline.