Four investment themes
Bear markets: what needs to happen before we can say the FTSE has beaten the bear?
The FTSE 100 needs to show three things: improved technicals, new leadership and lower volatility. Bear markets tend to set a grinding sequence of lower highs and lower lows as attempted rallies peter out and lead to fresh declines. To break its current run, the FTSE 100 needs to decisively move beyond 6,084 and then 6,315. The latest rally has been led by the previous cycle’s darlings – the miners. For the advance to convince you want to see a new sector or theme emerging to provide a driving narrative. You want to see lower volatility and more calm.
Volatility: the FTSE has had its most volatile start to a year for two decades. What are the implications?
In just 42 trading days this year the FTSE 100 has risen or fallen from open to close by 1% or more on 28 occasions. Volatility can be a chance to buy assets cheaply or sell them dearly, but wild swings such as these are not normally associated with bull markets, where serene progress tends to be the order of the day. During the bull-run years of 2004 to 2006, for example, there were just 12 moves up or down of 2% or more from open to close. We have had that many moves already in 2016.
Dividends: a lot of the top payers in the FTSE 100 have precariously low dividend cover. Who are they and what is the outlook?
Fourteen current or past FTSE 100 members have cut their dividends in the past 12 months, and earnings only cover the forecast payments for 2016 by around 1.7 times, which is less than ideal: cover of 2 times or more provides some comfort.
Just 10 stocks are forecast to make 55% of the cash dividend payments in 2016 and in some cases cover is very thin. BP, Shell, Rio Tinto (even after its cut), HSBC and AstraZeneca are the key names here and they will go a long way to shaping how income funds do this year.
Brexit: the pound has weakened on fears of a Brexit. Which sectors might that favour?
A look back to 1992 and sterling’s exit from the European Exchange Rate Mechanism could provide some clues here. Once the pound had done its swan dive, cyclical stocks and export-driven sectors quickly took the lead. Forestry, aerospace and tech hardware were among the best performers in the 12 months after the pound’s plunge, while defensive sectors such as beverages, pharmaceuticals and food retailers lagged, even if their performance in absolute terms was far from disastrous.
