Since their summer peaks, the FTSE 100 Index has fallen 7.7%, the FTSE 250 has fallen by 9.2% and the FTSE SmallCap is 9.7% lower. So far, the markets have been reacting to specific financial news related to debt markets rather than economic data and little attention has been given to corporate earnings which have been generally better than expected. Over the last year, the M&A boom has helped the UK market more than most and the FTSE 100 Index is 0.2% lower for the year to date compared to a 2.8% rise in the S&P 500 Index.
Normally, the real economy suffers little impact from a one-off financial event but recent woes pose more questions than answers largely because it is difficult to know the full extent of the financial losses. Nervousness is compounded by the size and importance of the financial services sector to the UK stock market and the UK economy e.g. Financials account for a 28% weighting in the FTSE All Share Index and the industry has been the biggest contributor to recent GDP growth. All it needs now is for falling US house prices to pass across the pond to add to the uncertainty. However, balanced against these concerns, there have been some large share price falls even in non-financial companies since 15th June and given the upward trend in corporate earnings, the valuation of equities looks attractive.
In the first half of 2007, UK equities were ticking along nicely i.e. the FTSE 100 Index was up over 6% but since hitting 6,732 on 15th June the Index has declined by 7.7%. The FTSE 250 peaked at 12,220 on 23rd May and has fallen 9.2% from its peak. The FTSE Small Cap reached a record high of 4,209 on 4th June and has fallen 9.7% since that date. At its worst, the FTSE 100 touched 5,859 down 13%. In terms of FTSE All Share sector performance, the tables below show the outcomes for the year to date (YTD) and since 15th June (15/06). Also, we produce a list of the top and worst performing FTSE 100 companies for the YTD and since 15/06.
Why it’s worse this time
Normally, specific financial events have little impact on overall economic growth as in 1998 when a liquidity crisis caused by the Russian default and the collapse of the Long Term Capital Management fund caused fears of a meltdown which never appeared. So, in theory, our summer equity market correction provides an excellent buying opportunity! Alas, almost daily announcements regarding banks and hedge funds exposure to the US sub-prime mortgage market and other asset back securities have emerged across the globe e.g. Germany, France, China and Japan as well as the UK and US.
It is estimated that up to 40,000 US jobs have been axed in the mortgage business as banks/brokers close or restructure their operations. More importantly, these financial issues stem from a key leading indicator of economic activity – the housing market. In the US, the Federal Reserve acknowledged that the risks to growth have increased and a Federal Funds interest rate cut looks likely on 18th September. Although the Bank of England has remained calm and quiet during recent events, the European Central Bank stated that it is not “pre-committed” to an interest rate rise on 6th September.
No doubt, central banks will calm financial markets eventually with injections of liquidity or interest rate cuts. In recent days, there have been some positive developments for markets in the form of Bank of America investing $2bn in Countrywide Financial (leading US mortgage provider) and Home Depot finally sealed a deal to sell its Wholesale Division for $8.5bn, albeit at a lower price than the original $10bn anticipated. Nevertheless, the more important issue is the recession in the US housing market. House prices fell by 3.2% in Q2 according to the S&P/Case-Shiller US National Home Price Index. This data predates the recent financial turmoil and an extended period of falling house prices would have a major negative impact on consumer confidence.
Similarly, in the UK, strong GDP growth of 3% was confirmed for the second quarter with financial services contributing 25% of the economic growth and household expenditure was still healthy despite earlier interest rate rises. However, house prices have started to “cool across the country” as affordability and a fall in the number of potential buyers begins to be felt.
How FTSE sectors have performed
Not surprisingly, within the UK equity market, the Bank sector is among the worst performers (-11%) and Real Estate which was already a weak sector has fallen another 10% since 15/06. General Retailers have been hit hard (-11.5%) as investors fear about the health of consumer spending as mortgage equity withdrawal begins to decline. Wolseley (high exposure to US housing) and Experian (provides credit services) have pulled back the Support Services sector (-10.5% since 15/06). In the Travel & Leisure sector (-10.8% since 15/06) the evaporation of takeover speculation and hiatus in corporate deals have hit Punch Taverns, Intercontinental Hotels and Mitchells & Butlers.
Mining stocks have been one of the best performing sectors YTD (+21%) and although the sector suffered from profit taking with a fall of 9% since 15/06, it has been largely driven by the problems at Lonmin (share price -27%) and a setback at Anglo American (-15%) and Rio Tinto (-15%). Three Mining stocks, BHP Billiton, Antofagasta and Vedanta have all shown gains of 5%, 12% and 6% respectively since 15/06. The Rexam share price has also bucked the trend on the back of reduced exposure to aluminium pricing. On the whole, despite the drag from a weak dollar, UK companies have reported pleasing Q2/H1 results and generally EPS estimates have firmed. Good results from British Aerospace and BSkyB boosted their share prices.
In summary, recent financial events look worse than in 1998 because of the widespread exposure among banks and hedge funds and deepening problems in the US housing market. Although large cap stocks have declined less than their smaller brethren, the losses if maintained could also be a negative factor on consumer confidence. However, the key driver of equity prices is the trend in corporate earnings and so far this remains encouragingly positive. Our tables below show some huge falls for some of the UK’s largest companies and no doubt there are some bargains to be picked up (look at some of the worst performing FTSE 100 stocks since 15/06).
Worst Performing FTSE ALL SHARE SECTORS
Year to Date %
FTSE ALL SHARE FORESTRY & PAP £ -38.66
FTSE ALL SHARE REAL ESTATE £ -21.36
FTSE ALL SHARE BANKS £ -11.59
FTSE ALL SHARE FINANCIALS £ -10.34
FTSE ALL SHARE GEN RETAILERS £ -9.65
FTSE ALL SHARE LIFE INSURANCE £ -8.61
FTSE ALL SHARE ELECTRICITY £ -6.56
FTSE ALL SHARE NONLIFE INSUR £ -6.45
FTSE ALL SHARE GENERAL FIN £ -6.35
FTSE ALL SHARE PHARM & BIO £ -6.09
FTSE ALL SHARE TRAVEL & LEIS £ -5.43
FTSE ALL SHARE HOUSEHOLD GDS £ -5.32
FTSE ALL SHARE HEALTH CARE £ -5.21
FTSE ALL SHARE LEISURE GDS £ -4.35
FTSE ALL SHARE GENERAL INDS £ -3.48
Since 15th June %
FTSE ALL SHARE FORESTRY & PAP £ -38.66
FTSE ALL SHARE GENERAL FIN £ -13.73
FTSE ALL SHARE GEN RETAILERS £ -11.55
FTSE ALL SHARE BANKS £ -11.11
FTSE ALL SHARE PERSONAL GOODS £ -11
FTSE ALL SHARE TRAVEL & LEIS £ -10.77
FTSE ALL SHARE AUTO & PARTS £ -10.72
FTSE ALL SHARE FINANCIALS £ -10.57
FTSE ALL SHARE LIFE INSURANCE £ -10.53
FTSE ALL SHARE SUPPORT SVS £ -10.48
FTSE ALL SHARE HOUSEHOLD GDS £ -10.26
FTSE ALL SHARE FD PRODUCERS £ -10.14
FTSE ALL SHARE REAL ESTATE £ -9.9
FTSE ALL SHARE GENERAL INDS £ -9.61
FTSE ALL SHARE ELECTRICITY £ -9.35
Best Performing FTSE ALL SHARE SECTORS
Year to date %
FTSE ALL SHARE CHEMICALS £ 24.32
FTSE ALL SHARE BASIC MATS £ 21.74
FTSE ALL SHARE MINING £ 21.35
FTSE ALL SHARE AUTO & PARTS £ 21.04
FTSE ALL SHARE CON & MAT £ 21.03
FTSE ALL SHARE OIL/EQ SVS/DST £ 17.09
FTSE ALL SHARE INDS ENG £ 16.19
FTSE ALL SHARE FD & DRUG RTL £ 13
FTSE ALL SHARE MOBILE T/CM £ 11.63
FTSE ALL SHARE H/C EQ & SVS £ 10.45
FTSE ALL SHARE TELECOM £ 9.37
FTSE ALL SHARE AERO/DEFENCE £ 9.03
FTSE ALL SHARE TOBACCO £ 8.87
FTSE ALL SHARE BEVERAGES £ 7.18
FTSE ALL SHARE TCH H/W & EQ £ 6.13
Since 15th June %
FTSE ALL SHARE CHEMICALS £ 4.51
FTSE ALL SHARE OIL/EQ SVS/DST £ 2.72
FTSE ALL SHARE LEISURE GDS £ 1.26
FTSE ALL SHARE INDS ENG £ 0.08
FTSE ALL SHARE CON & MAT £ -0.14
FTSE ALL SHARE S/W & COMP SVS £ -1.12
FTSE ALL SHARE BEVERAGES £ -1.81
FTSE ALL SHARE TECHNOLOGY £ -2.64
FTSE ALL SHARE MOBILE T/CM £ -3.03
FTSE ALL SHARE TOBACCO £ -3.22
FTSE ALL SHARE TELECOM £ -4.09
FTSE ALL SHARE GS/WT/MUL UTIL £ -4.16
FTSE ALL SHARE PHARM & BIO £ -4.64
FTSE ALL SHARE HEALTH CARE £ -4.95
Worst Performing FTSE 100 Stocks
Year to Date %
NORTHERN ROCK -38.37
SEGRO -30.17
TATE & LYLE -28.76
BARRATT DEVELOPMENTS -26.88
BRITISH LAND -25.15
HBOS -23.94
PERSIMMON -23.79
LAND SECURITIES -23.25
YELL GROUP -22.19
DRAX GROUP -20.03
BRITISH AIRWAYS -19.76
ICTL.HTLS.GP. -19.62
DSG INTERNATIONAL -19.16
BARCLAYS -18.15
FRIENDS PROVIDENT -17.97
WOLSELEY -16.79
BRITISH ENERGY GROUP -16.48
HAMMERSON -16.3
CARNIVAL -15.88
PUNCH TAVERNS -15.48
Since 15th June %
NORTHERN ROCK -28.54
LONMIN -26.98
ICTL.HTLS.GP. -24.01
WOLSELEY -22.74
MAN GROUP -21.32
SMITHS GROUP -20.26
BARCLAYS -20.23
SEGRO -19.21
MITCHELLS & BUTLERS -18.87
DAILY MAIL ‘A’ -18.79
PUNCH TAVERNS -18.72
CADBURY SCHWEPPES -18.39
EXPERIAN GROUP -17.42
BRITISH ENERGY GROUP -16.9
STANDARD LIFE -16.42
HBOS -16.08
BARRATT DEVELOPMENTS -16
RIO TINTO -15.55
KELDA GROUP -15.02
ANGLO AMERICAN -14.94
Best Performing FTSE 100 stocks
Year to Date %
BHP BILLITON 52.81
REUTERS GROUP 41.94
IMPERIAL CHM.INDS. 40.38
VEDANTA RESOURCES 38.33
ANTOFAGASTA 37.82
SAINSBURY (J) 34.76
BRITISH SKY BCAST.GROUP 27.78
CAPITA GROUP 24.3
RIO TINTO 21.67
SHIRE 20.96
SCHRODERS 17.47
JOHNSON MATTHEY 13.56
ROLLS-ROYCE GROUP 13.4
RECKITT BENCKISER 13.28
XSTRATA 12.94]
SABMILLER 12.85
BG GROUP 12.84
BRITISH AMERICAN TOBACCO 12.67
KAZAKHMYS 12.43
VODAFONE GROUP 11.8
Since 15th June %
IMPERIAL CHM.INDS. 15.57
ANTOFAGASTA 12.42
VEDANTA RESOURCES 6.16
BHP BILLITON 5.15
SABMILLER 5.15
SHIRE 4.74
CAPITA GROUP 3.57
BRITISH SKY BCAST.GROUP 2.46
REXAM 1.67
RENTOKIL INITIAL 1.64
BAE SYSTEMS 0.17
REUTERS GROUP -0.16
CENTRICA -0.78
NATIONAL GRID -1.28
LIBERTY INTL. -1.99
IMPERIAL TOBACCO GP. -2.69
VODAFONE GROUP -3.06
UNILEVER (UK) -3.51
BRITISH AMERICAN TOBACCO -3.54
GLAXOSMITHKLINE -3.54
By Jeremy Batstone-Carr, Director of Private Client Research at Charles Stanley