Impressed by the Dow? This stock market has performed just as well in 2016

Impressed by the Dow? This stock market has performed just as well in 2016
December 30 08:43 2016 Print This Article

The Dow Jones Industrial Average staged a surprise rally in the final months of the year, but the U.S. blue-chip benchmark isn’t alone in cheering investors in 2016.

The U.K.’s FTSE 100 index UKX, -0.20%  has also scored a knockout year, setting it on track for a 13.9% annual gain, it’s biggest since 2013. The jump puts the London benchmark neck-to-neck to the Dow DJIA, -0.07%  in terms of yearly performance, with the American index on Thursday flirting with a 13.7% 2016 advance.

The FTSE has also raced ahead of other European benchmarks, easily beating the Stoxx Europe 600 index’s SXXP, -0.11%  1.6% drop for the year and the German DAX 30 index’s DAX, -0.19%  6.4% climb.

Of course, for U.S. investors the stellar performance for U.K. stocks has been offset by the 17% slump for the pound in 2016.

“The FTSE has been helped by two factors this year. When we started in 2016, commodities, such as oil and mining, were massively out of favor and massively underperformed, which created a huge opportunity. Mining shares got very, very cheap and if you take a look at BHP Billiton BLT, -0.08% BHP, -1.73% BHP, +0.14% , the world’s largest miner, shares have more than doubled from the lows of late January,” said Chris Bailey, market analyst at Financial Orbit.

“The second factor was the Brexit vote in June. When the pound fell, the fact that such a high proportion of FTSE 100 earnings come from outside the U.K. started to be a big influence,” he added.

The pound GBPUSD, +0.2283%  plunged to a 31-year low against the dollar after the U.K.’s vote to leave the European Union. It also fell to a six-year low against the euro GBPEUR, -0.0856%  . The slump in sterling turned out to be a boon for large multinationals that make a majority of their profits overseas and then translate the money back into pounds.

The soaring dollar on the back of Donald Trump’s presidential win in the U.S. and rising Federal Reserve interest rates has further helped the big dollar earners in the FTSE, Bailey said.

Finally, rising oil prices after OPEC’s decision to cut oil production have also helped to lift the London-listed energy majors, such as BP PLC BP., -0.86%BP, +0.40%  and Royal Dutch Shell PLC RDSB, -0.74% RDS.B, +0.85%  .

The big question is whether the FTSE can keep its mojo in 2017. With gains of 287% for Anglo American PLC AAL, -0.39%  and 203% for Glencore PLCGLEN, -0.15% GLCNF, -0.71% 0805, +0.19%  in 2016, analysts doubt the mining sector will continue to rally at the same pace. There’s also speculation the pound effect will fade and that the weaker currency will begin to weigh on consumer sentiment.

“We believe that the benefits from the weak GBP are largely priced in, and the domestic activity is expected to slow down materially next year due to the Brexit uncertainty,” analysts at J.P. Morgan said in their year-ahead outlook. They also downgraded U.K. stocks to underweight from neutral.

More broadly, strategists forecast a small gain for the FTSE 100 next year. As laid out in the table below, the index is expected to rise to 7,275, up 2.5% from the 7,100 it was trading at on Thursday.

BankFTSE 100 forecast
J.P. Morgan7,150
Citi7,600
Credit Suisse7,000
Société Générale7,500
HSBC7,200
Morgan Stanley7,450
Deutsche Bank7,200
UBS7,100
Average7,275
view more articles

About Article Author

Mark Winterberg
Mark Winterberg

View More Articles