An over-reliance on ‘old world’ commodity giants has often been seen as the FTSE 100’s biggest weakness, but analysts at Barclays said there were good reasons why this might soon become a strength.
Equity markets around the world have chalked up strong gains over the past year or so, with tech firms, in particular, driving a large part of the gains.
This year alone, the S&P 500 has gained nearly 10 per cent while the Nasdaq index has added over 10 per cent. The DAX in Germany has risen over eight per cent and the CAC in Paris over seven.
The FTSE 100 is often seen as a poor relation next to these markets, having gained just 3.4 per cent. Mining firms have weighed on the FTSE given China’s recent economic travails.
FTSE 100 fortunes start to change
However, if, as many economists expect, the global economy faces more supply shocks and geopolitical fragmentation in the immediate future, then some of the FTSE’s biggest firms might come into demand.
“The commodity/value/defensive-heavy FTSE100 means it may also work as a stagflation hedge, should geopolitical/supply issues risks linger,” Emmanuel Cau, Barclays head of European equity strategy said.
Reflecting a more positive picture on both the supply and demand side, analysts at Barclays have upped their Brent forecasts to $94 this year and next – up from $90 previously.
While acknowledging that a more volatile global backdrop could dent market confidence, Bau argued that “UK equities can still do well against such a backdrop, acting as a good hedge, given their unique commodity plus defensive-heavy sector tilt”.
But there were other reasons why Cau argued investors should increase their exposure to the FTSE 100, starting with Brexit.
“Brexit has been a overhang on the region for years now,” he said. “But UK co-ordination with the EU appears to be improving across both major parties, with elections looming, which could unwind some of the risk premium placed on UK markets.”
Although Labour confirmed earlier this week that there will be no return to the single market or customs union, markets still expect a change in government to lead to a closer relationship with the EU.
“A closer relationship with the EU may generate more goodwill among investors and, after eight years, some of the Brexit risk premium may start to unwind,” Cau said.
Even beyond Brexit, Cau was optimistic. “With multiples looking depressed, inbound M&A, and buybacks are seeing a pick-up, which could help valuations,” he said.
“Moreover, savings reforms are gaining traction, which could also improve the bid for UK equities over the medium term.”