🇬🇧 The UK Stock Market is in a Catch 22 — Here's What Might Happen Next
The FTSE 100 climbed above its record closing level this week. Unfortunately, the optimism did not last, and Friday's crash could be the start of another downtrend in the weeks ahead.
Hello there! I'm John Choong, Senior Equity Research Analyst at InvestingReviews. Every weekend, I bring a different and unique perspective to the week’s biggest macroeconomic data and stories, and what it means for your investments.
✋🏻 Top 5 Things We’re Watching
🛍️ BRC shop price inflation now lower than 2%: Shop inflation fell further to 1.3% in March, with prices ACTUALLY dropping from February (-0.4%). Non-food inflation also stooped to 0.2% — another positive for the CPI report in 2 weeks.
🐇 March events fail to boost retail sales: Mother’s Day and Easter didn’t do much to help high street retail sales, according to BDO. Retail sales dropped 2.2% as compared to last year, and sunk further from last month’s -1.3%.
✅ Mortgage approvals hit 17-month high: Alongside upward revisions through to December, February’s print of c.60.4k shows that demand for housing is returning. Approvals are now only c.5k shy of the 10y average.
🏃🏼♀️➡️ House hunters accelerate home buying plans: With rates seemingly stuck and personal finances improving, prospective homebuyers are reportedly feeling more urgency to get onto the property ladder because of FOMO.
3️⃣ Great things come in threes: For the first time in 20 months, all three of the UK’s sectors (manufacturing, services, construction) grew in March, according to S&P Global’s PMIs, essentially confirming that the UK recession is all but over.
📊 Markets This Week
📈 FTSE 100: 7,911 (↓0.52%)
🇬🇧 FTSE 250: 19,710 (↓0.88%)
🧾 5-Year Yield: 3.936% (↑2.71%)
💵 GBP/USD: $1.26/GBP (↑0.05%)
🎟️ Taylor Wimpey: 132p (↓3.61%)
🗞️ Sector Roundup
🏘️ Housing: Nationwide (1.6%) and Halifax (0.3%) reported house price growth meaningfully below consensus of 2.4% and 1.5%, respectively. That said, we see this as more of a blip than a concern, due to the current rate environment.
🏦 Banks: Household deposits rose by £6.0bn in February. With more money floating back into current accounts (lower interest) than to fixed deposits (higher interest), banks may see their declines in net interest margins in Q4 stabilise.
🛢️ Energy: Oil stocks like Shell SHEL 0.00%↑ and BP BP 0.00%↑ continue to rally as Brent Crude tops $90 per barrel. The energy sector is now the stock market’s best-performing sector in 2024 as oil prices close in on a 1-year high.
🛒 Food Retail: Ocado (13.0%) and M&S (11.2%) were the two-fastest growing supermarkets in March, according to Nielsen. Their market shares grew by 0.1% and 0.2%, respectively, with M&S now 0.5% away from overtaking Waitrose.
✈️ Airlines: Travel shows no signs of cooling. Ryanair RYAAY 0.00%↑ (8%) and Wizz (12%) both reported increases in passengers flown in March, although the latter saw a 1.3% decline in its load factor due to an unfavourable route mix.
🐂 The FTSE 100’s ‘Bull Run’ May Already be Over
Whilst the media and certain pockets of the investing community were feeling jubilant about the FTSE 100 soaring above 8,000 points earlier this week, we remained sceptical and saw no real reason to celebrate because of two main reasons — historical trends and the stocks leading the charge. Let’s explore.
Although I’m no fan of ‘technical analysis’ and think it’s hoo-ha for the most part, I can’t help but notice the unsavoury trend the FTSE 100 has had over the past couple of years. That’s that with every new high, comes a drawback shortly after. This trend has pretty much been on repeat since 2017, and is why investors continued to rotate out of UK equity funds for a 34th consecutive month.
Nonetheless, we think one of the main reasons why recent rallies have been unsustainable is because of the stocks that have led them. What do we mean by this, you might ask. Well, the FTSE 100 is a culmination of the top 100 companies in the UK by market cap. Despite that, they’re not equally weighted. To put it simply, oil majors like Shell and BP make up almost 13% of the index’s performance.
As such, just as the likes of Apple AAPL 0.00%↑ and Microsoft MSFT 0.00%↑ were responsible for the S&P 500’s gains last year, so have Shell, BP, and HSBC HSBC 0.00%↑ for the FTSE 100. Thanks to oil prices shooting up to $90/bl, the Chinese economy starting to show signs of life, and the prospect of rate cuts, energy, financials, and industrials have supported the FTSE 100’s rally given their weightings.
Having said that, the rally has been sparked — at least in part — by inflationary elements. Rebounding UK and Chinese economies, as well as a stronger-than-expected US economy, combined with geopolitical tensions have driven up certain commodities and more importantly, oil prices. This has huge implications given how paramount oil is to, well, everything.
While those holding energy stocks will rejoice after a lacklustre 2023, it nevertheless undermines the long-term prospects of Britain’s premier index. Quite simply, higher oil prices usually translates into higher commodity prices, higher wages, and higher inflation. This results in delayed rate cuts, and more crucially, lower earnings for companies. And when you have lower earnings, share prices can’t grow.
“But the energy giants will see their earnings grow!”, I hear you say. True, but it’s also cyclical. In other words, as soon as demand starts to wane because people can no longer afford to buy stuff with higher prices (AKA, second-round inflation), oil prices will come back down again. Hence, the FTSE 100’s up-and-down road to no where.
Nevertheless, headline inflation is still forecasted to drop to 2% in April and remain below that by the end of Q3, if everything goes according to plan. This is mainly due to the lower energy price cap expected in July. However, this makes CPI extremely susceptible to energy shocks, and was one of the main reasons why Britain’s inflation was much higher than the US and rest of its EU peers.
Thus, it’s crucial to get core and services inflation as close to 2% as possible before the Bank starts cutting rates — and even that isn’t straightforward. Second-round effects from higher minimum wages and pensions are still relatively unknown and may take a while to kick in. Plus, goods prices (which helped disinflation massively) are ticking up again after input prices went up, as per the latest manufacturing PMI report.
🎥 This short 3-minute interview of renowned Panmure Gordon Chief Economist Simon French perfectly explains why rate cuts aren’t as straightforward as it seems.
Therefore, the next rally needs to broaden beyond oil and financials if the FTSE 100 is to sustain its 8,000 point crown — think consumer staples, retail, healthcare, etc. It will also help when the rate-cutting outlook is clearer, as long as employment remains robust in a growing economy. This could happen at any time, of course, which is why we’re staying invested. But until then, expect more see-sawing. Happy investing!
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🔎 Data Points to Watch Next Week
🖥️ BRC Retail Sales Monitor: If the latest BDO sales data is any indication, the prospect of any uptick in retail sales values has been dashed. Markets expect a flat read (1.1%) for March, but any surprise to the upside could help retail stocks.
📝 RICS House Price Balance: The downbeat house price data in March from Nationwide and Halifax, may have punctured a few optimistic balloons, but a further recovery is expected when the RICS releases their report next week (-5%).
📦 GDP (M/M): With Q1 GDP expected to rebound from quite possibly the shortest recession in history, February’s print should build on January’s 0.2% expansion with growth of 0.1%.
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