March 25, 2023

SecondRitain’s stock market has its critics, who have for years derided it as a trite collection of “19th century companies,” even call it Jurassic Park Index lacking cutting-edge members.

But every dinosaur has its day, and, like Jurassic Park Among franchises, the FTSE 100 blue-chip index has seen a recovery in 2022.

While most stock markets were battered, the FTSE managed to gain about 1% – not a huge gain, but enough to outpace its rivals. The U.S. S&P 500 has fallen 14% since early January as rising interest rates hit the tech frenzy. Germany’s Dax fell nearly 19% as worries about energy shortages pushed German consumer confidence to a record low.

In fact, the FTSE 100 has been kept afloat by some old-economy companies despised by growth investors. Oil majors BP and Shell defied broader market volatility: Their shares rose nearly 40% as they profited from a surge in gas and oil prices caused by the war in Ukraine.

Arms maker BAE Systems was the best performer on the FTSE 100 this year, up nearly 50% as the Russian invasion heralded an increase in government orders for military kits.

“Banks such as HSBC and Standard Chartered also outperformed, helping to support the FTSE 100, with higher interest rates boosting net interest margins,” said Victoria Scholar, head of investment at Interactive Investor. Tobacco companies such as Imperial Brands and British American Tobacco also fared well, up nearly 14% and 25%, respectively.

The pound has lost 12% of its value this year as Britain’s economic outlook deteriorates, helping exporters. The outlook for sterling is also dire, with an 80% hike in the energy price cap in October that could hit the pound.

Wednesday will see the FTSE 100’s quarterly shuffle, with asset manager Abrdn on track to downgrade to the smaller FTSE 250 index after a 40% drop this year.

“Substantial geopolitical uncertainty, high inflation and concerns about economic growth have been challenging the asset management industry,” said Susannah Streeter, an analyst at Hargreaves Lansdown.

Other potential downgrade candidates are generic drug maker Hikma Pharmaceuticals, whose sales have been hit by stiff competition, and kitchen maker Howden Joinery, as the cost of living crisis prevents people from spending money on home improvements.

Medical companies ConvaTec and F&C Investment Trust, which make wound and skin care products, are frontrunners into the FTSE 100. The restructuring will depend on the closing price next Tuesday.

Mike Ashley’s Frasers Group could also move back to the top spot from the FTSE 250. Its shares hit a 10-year high in July after the company posted a record profit as it reopened stores after lockdown to boost sales.

However, North Sea oil and gas producer Harbour Energy led Frasers after reporting a 12-fold increase in pre-tax profit in the first half of the year.

But the outlook for the UK and European markets remains clouded by uncertainty: record energy prices and possible gas rationing could tip the European economy into a deep recession. With inflation nearing double digits in the euro zone – already over 10% in the UK – real incomes for consumers will fall sharply, which will severely squeeze spending.

Mark Dawding, chief investment officer at BlueeBay Asset Management, worries that Europe’s looming recession could be as severe from an economic standpoint as it was after the 2008 financial crisis. “Certainly, should we hear that Putin wants to quit? The whole prospect of the army and the push for peace may be fleeting,” he added.

Despite fears that the U.S. could slip into a recession, the broader outlook could also depend on when the Fed raises U.S. interest rates.

Federal Reserve Chairman Jerome Powell delivered a hawkish tone at the Jackson Hole Economic Symposium in Wyoming on Friday, saying borrowing costs must remain at growth-damaging levels “for some time” to curb soaring cost of living. “These are the unfortunate costs of lowering inflation,” he said.

That could cause some pain for households and businesses – another sign that winter could be tough.

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