Cyclical stocks will have their moment in the sun in 2017, rebounding sharply from their 2016 lows, Mould also predicted.
Over the last five years, the UK market’s bias toward financials, oil & gas and mining stocks, which also make up 44% of the FTSE 100’s market cap, has proved a major hindrance to the economy, causing it to lag behind international peers on a total returns, sterling-denominated basis.
But by the same token, ‘the FTSE 100’s previously unpropitious mix’ could provide one of its biggest boons, in Mould’s opinion. Current analysts’ forecasts suggest that financials, oil & gas and mining FTSE 100 stocks will account for 52% of its £1.7tn in revenues, 48% of its total profits and 49% of the index’s total dividends.
“Moreover these sectors represent 76% of the growth in profits that is expected for 2017 and 52% of the expected growth in dividends for next year,” said Mould.
Under these conditions, he thinks it is conceivable that the FTSE 100 will advance 6% from where it stands currently and reach 7340 by the end of the year.
“That might not sound like a lot but that gain would be supplemented by a dividend yield of around 4%, making for a 10% total return,” Mould stressed. “That is a figure well beyond anything on offer from even the best cash accounts or ISAs and which also dwarfs the 1.49% yield currently on offer from 10-year UK Government bonds, although the stock market comes with the greater risk of loss than cash or bonds.”
However, the FTSE 100’s ascension next year could be jeopardised by a number of factors – rising interest rates in the US, higher government bond yields, a dollar that is too strong and oil prices that have climbed too high.
“All could hit global growth and short-circuit the “reflation” trade which has become popular post the UK’s Brexit vote and the election of President Trump,” he explained.
And a drop in earnings could leave the UK market exposed on the downside, Mould said, regardless of whether levels of corporate profits are maintained or exceed their targets.
“Despite these risks, however, the UK’s 4%-plus dividend yield and the value opportunities potentially presented by the banks, insurers and other domestic facing plays do suggest the FTSE 100 has upside potential to offer in 2017,” he argued.
To exploit the future opportunities presented by the recently unloved cyclical giants of the FTSE 100 index, Mould recommends investors look to value focused funds like the Jupiter UK Special Situations fund and Buxton’s Old Mutual UK Alpha vehicle. The Artemis Income fund headed by Adrian Frost, which has BP, Royal Dutch Shell and Lloyds among its top ten holdings and is comprised of 75% large caps, should also perform well, Mould anticipates.