Two political shocks loom over this year’s review. The UK’s vote to leave the European Union, and the election of Donald Trump as the 45th president of the United States. Both of these events had an immediate impact on the market last year. One expected result was a fall in the value of sterling triggered by the Brexit vote, as anxieties increased over the UK’s ability to fund its current account deficit. Less expected was the sell-off in the government bond market and a surge in developed market stocks, as the tax cuts and spending promises of Mr Trump were digested along with a strengthening US economy.
In our analysis of the prospects of these FTSE 350 sectors we have tried not to let these trends overly dominate the narrative: each grouping has its own trends and cycles that will progress alongside the political cycle. At the same time, there are sectors that are already being reshaped: importers struggling with rising dollar costs, exporters buoyed by dollar earnings, and banks and life assurers hoping for a continuation in the trend towards rising long-term interest rates. Those issues we have taken up.
As we went to press with this supplement, the prime minister who emerged from last year’s political fallout, Theresa May, was starting to set out her vision for a so-called ‘hard’ Brexit: the UK would leave the single market and renegotiate partial membership of the customs union, in order to ‘take back control’ of its borders and laws. Still, the formal trigger to leave the EU, Article 50 of the Lisbon treaty, has yet to be pulled, and there is much negotiation ahead.
It is reasonable to expect that by this time next year we should start to have an idea what kind of deal the two sides are heading towards. The most important aspect will be the arrangement for the services segment of the domestic economy, which currently generates around 79 per cent of our gross domestic product. The outlook for business services, financial services, consumer confidence, not to mention the London job market: all these are blowing in the wind.
The housebuilding sector had a tellingly volatile year. It slid after the Brexit vote as the economic alarm bells started ringing, before recovering, seemingly to reflect the underlying imbalance between supply and demand that is underpinning price growth, not to mention the fact that these businesses are throwing off cash to their shareholders at present.
There is the risk of a false calm, given that the market dislocation predicted upon the elevation of The Donald and the Brexiteers did not materialise. While it was perhaps silly to think that the market could move to ‘price in’ a Trump presidency or Brexit, by the same token we have yet to see what form either political change will take. The economic forecasts on what a post-Brexit UK economy could look like have not been proved right or wrong on the basis of stock market movements ahead of the negotiations beginning.
There are other cycles to think about, too. If we are returning to a world of higher inflation and rates, a more immediate threat to consumer confidence may not be Brexit, but the growth of unsecured credit. Consider Secure Trust Bank (STB),
which has stopped issuing new unsecured personal loans, due to concerns over forecasts of slower economic growth, rising unemployment and higher inflation – just as it reduced activity between 2006 and 2008. The decision may again prove prescient.
Last year was one when it finally paid to be contrarian on commodities, demonstrating – as my colleague Alex Newman explains in his review of the industrial miners – that some exposure to this volatile market can pay off, and then some. The stellar outperformance of these stocks, plus the Brexit vote-related dollar bounce, flattered the performance of the major indices. The FTSE All-Share delivered a whopping total return of 28 per cent over the past 12 months, according to Morningstar, against an average of 21 per cent for open-ended equity funds.
Overall, these events demonstrated once again the worth of a diversified portfolio – both by industry and by geography. In an uncertain time for UK plc, strength in depth, or strength in width, may show its worth for the private investor.
See below for links to all the sector reviews.
For a desktop optimised version of this with easy to read sector reviews, click here.
For James Norrington's assessment of the best value companies across all the FTSE350's sectors, collated into a model portfolio, click here.
Mining
Almost every major commodity stock did very well in 2016. Expect divergence in the year ahead.
Oil & Gas/Chemicals
Wide ranging self-help measures and a concerted effort on a national level to support oil prices from the major oil producing nations saw recovery in many share prices in 2016, but are the oil and gas majors out of the woods yet?
Financial services
A recovery in the UK economy, and the strong stock market showing in 2016 boosted both banks and asset managers, but significant challenges remain under the surface, not least of all the prospect of economic uncertainty in the coming months and the threat of a Brexit damaging the City's dominance
General Retailers & Food & Drug Retailers
After another year of attrition, the major supermarkets look to be turning a corner, and the return of food price inflation is welcome too. On the high street consumer spending has been buoyant, but was that a last hurrah?
Real Estate, Housebuilders & Construction
Property companies took a hit following the EU referendum vote, but have staged something of a recovery since while the housebuilders plough on relentlessly, but can their form hold?
Food producers & household goods
Uncertainty over emerging markets, dramatic currency moves and consumer concerns closer to home paint a mixed picture for this sector
Food producers & Household goods
Travel & leisure
Consumer spending has been a boon, but geopoltical concerns and currency movements muddy the waters for some.
Technology, media & telecoms
Convergence coupled with changing methods of consuming and using media and technology add up to a sector in almost permanent flux
Support services
Government outsourcing remains a benefit for this sector, but is not a gravy train for all, meanwhile those servicing the private sector should beware the cycle turning
Engineering, industrials & aerospace
Global growth remains a concern although defence companies may benefit from rising geopolitical tensions and sterling weakness is benefiting others
Utilities
Energy prices, regulatory concerns and maintaining dividends mean utilities remain in the spotlight
Insurance
Regulatory changes and political meddling are never far away for the insurers
Health & pharmaceuticals
Healthcare should be in a good place with ageing populations demanding more care, but potential political meddling and the challenge of maintaining pipelines of new products remain concerns
