Can the Footsie get back on track like singer Kate Bush? Blue chips may soon be running up that hill
It’s 1984. Britain is in the grip of the miners’ strike; fans of singer Kate Bush are speculating about her forthcoming album and a stock market index has been launched – the FTSE 100, soon to be known as ‘the Footsie’.
Thirty-eight years on, major industrial action has returned, and Kate Bush is in the charts again, with fans hoping she will release new music.
Meanwhile, against a background of market turmoil, the FTSE 100 index, which includes such household names as Aviva, BAE, Lloyds and Rolls-Royce, is down 6 per cent since the start of 2022.
It could be worse – it is still the world’s best performing major index. The Dow Jones has fallen 19 per cent, the S&P 500 by 24 per cent.
Some fear, however, that the Footsie’s relative resilience may be short-lived. The Bank of England, City chief executives and top economists believe that the UK is heading for recession.
In the US, there are similar warnings from the Tesla boss Elon Musk, economist Nouriel Roubini and Goldman Sachs chief economist Jan Hatzius. A US recession would exacerbate the woe here.
Yet it’s worth noting that the big businesses that make up the FTSE 100 should be more able to weather economic storms, while providing an income. The average dividend yield on the index is 3.91 per cent. This may not match inflation, but there is the potential for capital growth.
The US indices have tumbled largely as a result of the effect of higher inflation and interest rates on companies that did not exist when the Footsie was created, such as Amazon and Netflix.
The streaming service’s use of Kate Bush’s Running Up That Hill track in its Stranger Things drama has revived interest in the star.
The Footsie has been less hard-hit because it has no such stocks.
Sterling’s weakness has also made London-listed businesses attractive to bargain-hunting US private equity players. The index’s forward price-to-earnings (p/e) ratio is 12, making it appear inexpensive when compared with the Dow and S&P 500 whose p/e ratios are 17 and 20 respectively.
The pound’s decline since Brexit has raised the value of Footsie firms’ dollar revenues in sterling terms. As much as 75 per cent of their revenues come from overseas.
The soaring prices in dollars for oil and raw materials have helped the Footsie.
Indeed, such is the might of its energy and mining constituents – giants like BP and Shell – that it is perceived to be a hedge against inflation. Russ Mould of AJ Bell says these firms make up 22 per cent of the Footsie’s total valuation, 45 per cent of its forecast profits and 34 per cent of its forecast dividends for 2022.
But, let’s not overlook the risks. Mould says: ‘The danger is that a recession leads to demand destruction, oil and metal prices fall, dragging FTSE 100 earnings and dividends with them, which would mean the market may not be as cheap as it looks.’
FTSE 100 sceptics point that the current level of 7190 is barely above that on December 31, 1999, before the dotcom bubble burst.
But its companies have since paid out billions in dividends, and this year dividends should total £81.2billion, while share buybacks should hit £32.7billion. Rio Tinto, Shell, Glencore and BAT, the most bountiful members, may together distribute £23.4bn.
All good news for funds like The Merchants Trust. This investment trust focuses on high-yielding Footsie firms. Manager Simon Gergel says: ‘The 100 is trading well below the valuation of other developed markets, so we can find companies at a price below what we believe they are really worth. They can provide good income.’
If you shun Big Tobacco, oil and miners on ethical and eco grounds, the Footsie may hold little appeal. You may be more concerned about committing cash to any share.
A way to lessen hazards is to put small amounts monthly in suitable trusts and funds – an approach I like. Options include low-cost index trackers such as the iShares 100 UK Equity and the Vanguard FTSE UK Equity Income or an active fund like Troy Income & Growth, which has exposure to Footsie names like Diageo, but avoids oil and mining.
Whichever you select, you will be hoping, the economy will soon be running up that hill.