These four sectors will make or break the FTSE 100's record winning streak
The FTSE 100 has been in sensational form since returning from the New Year's break, having made a record high of 7,143 moments before trading closed for 2016.
The index has powered further and clocked up a ninth consecutive record closing price on Tuesday (10 January) at 7,275. This represents the longest winning streak in the index's history.
The question for investors now is whether this momentum can be sustained moving on through 2017, a year that promises to be trying with plenty of potential political shocks along the way.
According to analysis by AJ Bell, though, the fortunes of the UK's blue-chip index rests on the performance of four key sectors: banks, insurers, miners and oil & gas producers.
These sectors represent a combined 45% of the FTSE 100 by market capitalisation and, according to Russ Mould, investment director at AJ Bell, wield the greatest influence on the index.
Make or break for the FTSE 100
An aggregate of bottom-up analysts' consensus forecasts shows that these sectors are forecast to provide 48% of FTSE 100 firms' total profit and 50% of total dividend payments in 2017, Mould elaborates.
The table above shows this, with banks and insurers bracketed together in the 'financials' bucket.
"However, this quartet's influence looks all the more potent when their contribution to growth in earnings and dividends is assessed," Mould adds.
"In this case, they are forecast to provide 76% of the anticipated £48.7 billion increase in FTSE 100 pre-tax profits and 52% of the projected increase in dividends [as shown in the table below]."
These sectors do tend to be somewhat cyclical, though, so will not be to every investors' taste - as demonstrated by the recent long run of popularity the more reliable, defensive parts of the market, so-called 'bond proxies', have enjoyed.
Mould concedes this, pointing out all four sectors 'disappointed shareholders in 2014 and 2015 before roaring back into fashion in 2016'. 'For the FTSE 100 to perform strongly in 2017, these areas all need to deliver the profit and dividends expected of them,' he continues.
"All four are suited by the market's current preferred narrative, namely that economic growth and inflation will accelerate in 2017 thanks to a shift from austerity to fiscal stimulus.
"If this scenario pans out as expected, then the dollar, oil, metals prices and government bond yields could all rise, to the potential benefit of the key mining, oil, bank and insurance sectors.
"If that agenda gets blocked or fails, or fails to generate the expected improved momentum, then there could be trouble ahead."
This story was originally written for our sister magazine, Money Observer.
The term is interchangeable with stock exchange, and is a market that deals in securities where market forces determine the price of securities traded. Stockmarket can refer to a specific exchange in a specific country (such as the London Stock Exchange) or the combined global stockmarkets as a single entity. The first stockmarket was established in Amsterdam in 1602 and the first British stock exchange was founded in 1698.
A way of valuing a company by the total value of its issued shares and calculated by multiplying the number of shares in issues by the market price. This means the market capitalisation fluctuates continually as the value of the shares change in the market. For example, HSBC has 17.82bn shares in issue at a price of 646.2p making a market capitalisation of £115.15bn.
A market-weighted index of the 100 biggest companies by market capitalisation listed on the London Stock Exchange. It is often referred to as “The Footsie”. The index began on 3 January 1984 with a base level of 1000; the highest value reached to date is 6950.6, on 30 December 1999. The index is “weighted” by how the movements of each of the 100 constituents affect the index, so larger companies make more of a difference to the index than smaller ones. To ensure it is a true and accurate representation of the most highly capitalised companies in the UK, just like football’s Premier League, every three months the FTSE 100 “relegates” the bottom three companies in the 100 whose market capitalisation has fallen and “promotes” to the index the three companies whose market capitalisation has grown sufficiently to warrant inclusion. Around 80% of the companies listed on the London Stock Exchange are included in the FTSE 100.
If you own shares in a company, you’re entitled to a slice of the profits and these are paid as dividends on top of any capital growth in the shares’ value. The amount of the dividend is down to the board of directors (who can decide not to pay a dividend and reinvest any profits in the company) and they will be paid twice yearly (announced at the AGM and six months later as an interim). Dividends are always declared as a sum of money rather than a percentage of the share’s price. Although dividends automatically receive a 10% tax credit from HM Revenue & Customs (HMRC), which takes the company having already paid corporation tax on its profits into account. Dividends are classed as income and, as such, are liable for personal taxation and so shareholders have to declare them to HMRC.
An increase in the general level of prices that persists over a period of time. The inflation rate is a measure of the average change over a period, usually 12 months. If inflation is up 4%, this means the price of products and services is 4% higher than a year earlier, requiring we spend and extra 4% to buy the same things we bought 12 months ago and that any savings and investments must generate 4% (after any taxes) to keep pace with inflation. Since 2003, the Bank of England has used the consumer prices index (CPI) as its official measure of inflation (see also retail prices index).