Most mature international equity indices have made astonishing gains in 2017, though some better than others. What has been apparent this past year is the fact that global growth has manifested itself at its strongest rate since the credit crisis in 2009. Apart from a few small increases in the US, rates have been close to zero and with yields on stocks ranging between 3% and 6%, there has been little enthusiasm to lighten up portfolios.
With so much money around and with no alternative liquid asset classes to titillate investors’ appetite being available, equities continue to attract funds. Also, according to the IMF and the OECD, the outlook for 2018 is even stronger with global growth predicted to reach 3.7%. It would appear that the UK, thanks to the vagaries and uncertainty of Brexit and the possible lack of investment will only grow by 1.5% with the British Chamber of Commerce believing that it will be just 1.1%.
At the time of writing the DOW has added 25.6% so far this year and nearly 40% since Donald Trump became President, with the NASDAQ up 29%, the Shanghai Composite +21.4% , the Hang Seng +35.7% and the NIKKEI 19.2%. The FTSE 100 sadly has languished way behind and is only 6.7% in credit over the same period. There are reasons for this underwhelming performance. Firstly, the FTSE 100 has been a foreign exchange play. The Pound fell by 17% in the last six months of 2016, which allowed the FTSE 100 to post a 17% gain to the end of 2016, as 60% on the constituent stocks post Dollar earnings.
This year the Pound has gained 7% against the Dollar, so those perennials such as the miners, HSBC, Imperial Brands, Glaxo and BP have posted anaemic performances, as have some banks, utilities and retail stocks. There has also been the uncertainty of Brexit hanging over equities like the sword of Damocles. However the FTSE 250 has gained a very respectable 14.5%, reaching an all-time record of 20,642 on Thursday 28th December 2017.
What of 2018 for UK equities?
Overseas investment in UK has been buoyant, thanks in the main to weak Sterling, but investment by UK fund managers in the domestic equity markets has been very disappointing. There seems to be slightly more clarity over the direction of BREXIT, which may lead to PM May’s government agreeing to something approaching acceptable trade negotiations with the EU.
However with the future P/E ratio for the FTSE 100 standing just short of 15 times earnings, some kind of a shake-out in the first quarter cannot be ruled out, though most people believe it will be limited due to the weight of money. The time for equity acolytes to take their leave is when it becomes clear that interest rates across the spectrum are on the move in an upwardly direction.
The FTSE 100, as previously flagged up, has been a foreign exchange play. Unappetising growth forecasts for the UK could in essence put a block on real progress. In some respects it looks fully valued, though there are one of two companies such as Royal Dutch Shell, Just Eat, RBS and Barclays, which could come to hand in 2018.
The aforementioned two seem to be on a roll with tremendous prospects with the two banks on the recovery trail. The government will be looking to sell a fair portion of its equity back to the public once the US DOJ has finished its deliberations and the fine for market manipulation has been settled.
2018 should be a period for picking growth stocks from FTSE 250 and AIM that have potential value written all over them. My colleagues at Panmure Gordon & Co have been fastidious in flagging up a few, which perhaps should be given consideration. Few FTSE 100 companies go into Panmure’s frame as the company tends to focus on SMES.
However Barrie Cornes recommends Prudential. Not only are its Asian and US operations blazing the trail, but also its UK annuity sales look set to enhance shareholder value. Colin Smith posts an excellent case for Eland Oil and Gas thanks to a rapidly high margin production in Nigeria. Caution over the threat of unrest in the Delta has been taken in to account.
Pension funds set to transform British businesses doing good
Small and medium businesses are struggling to get funding, new research reveals
The UK’s ‘alternative finance’ industry is now worth £4.6 billion
Dr Julie Simmonds believes that Faron Pharmaceuticals has much to offer with the outcome for Tramakine’s trial for acute respiratory distress syndrome a likely winner. Adrian Kearsey suggests Speedy Hire has much to offer as a provider of equipment rental and support services, with manufacturing output on the rise here in the UK.
Loop Up, whose share price has doubled since its IPO, continues to offer great scope for conference calling SaaS products, according to Peter McNally, Panmure’s technology analyst. Informa stand out from the media sector for Jonathan Helliwell.
Sadly not every company gets the green light for 2018. Mark Irvine-Fortescue warns of the short comings of Tui Travel. The company will require increasing capital to sustain profit growth which may well stunt share valuation growth. It may prove sensible to give this share some breathing space. Finally Sanjay Jha has his doubts about the defence operator Meggitt. He thinks it has too much debt, leaving the company fragile to a shock like Cobham.?