The FTSE 100 has suffered its worst first quarter since 2009 making the UK the worst performer of 23 developed markets. We examine sector performance and explain the reasons why.
Trade wars, Brexit and rising interest rates - it’s been a busy start to 2018. How these events play out in the long term is anyone’s guess, but for now investors have passed judgment – they’ve run for the hills, at least in the UK.
The FTSE 100, the index for the UK’s 100 biggest stockmarket-listed companies, has fallen 8.4% since the start of the year. It has recovered slightly after suffering a “correction” (defined as a 10% fall from a recent high) earlier in March.
It is still the index's worst first quarte performance since the start of 2009 during the height of the financial crisis. It is the poorest performing index among the 23 developed markets, as ranked by index firm MSCI, in the year to date.
Over the same period, the S&P 500 in the US was down just 2.6%. Stockmarkets in China and Europe fell 4.4% and 5.1% respectively. Japan’s Nikkei 225 is the only index where the selling rivals the FTSE 100, down 7.1%. In contrast, Hong Kong’s Hang Seng even managed to stay in positive territory, up 0.6%. This is because financials make up nearly 50% of the index. Financials tend to benefit when interest rates rise.
How the global stockmarkets have fared so far in 2018
Source: Schroders. Datastream data as at 29 March 2018. Past performance is not a guide to future performance and may not be repeated.
What is causing the FTSE 100’s strife?
Uncertainty about the UK’s long-term relationship with the European Union (EU), its biggest trading partner, remains a dominant theme. Despite concessions on both sides the terms of a divorce have yet to be finalised. As a result of the uncertainty, the UK economy is expected to grow by around 2% in 2018, the slowest among the developed nations.
The prospect of an impending trade war has left its mark too. US president Donald Trump has announced tariffs on steel and aluminium. The UK has escaped the worst of the impact so far having negotiated a temporary exemption. But the concern is that if a trade war erupted between China and the US then everybody would lose as the prices of goods would rise, exacerbating inflation.
The strengthening of the pound hasn’t helped either. It is up 4% against the US dollar this year. The prospect of higher interest rates paves the way for better returns on cash held in sterling. The market has already priced in a May rate rise and more could follow this year as the Bank of England juggles controlling the rate of inflation with economic growth. Higher rates pave the way for better returns on cash held in sterling.
However, it’s not such good news for businesses that trade internationally. The majority of FTSE 100 revenues are received in foreign currency, and this money is worth less when converted back into pounds when sterling is stronger.
As the chart below shows, it’s not just the UK’s main index that has been given the cold shoulder by investors. The FTSE 250 and the All-Share indices have fallen too, down 5% and 8% respectively.
The UK stockmarket vs the British pound since the start of 2018
Source: Schroders. Datastream data as at 29 March 2018. For information purposes only. FTSE indices and USD/GBP exchange rate rebased to 100 for comparitive purposes. Please remember that past performance is not a guide to future and may not be repeated.
For broader context, the recent correction follows a period of nearly two years - from 11 February 2016 to 12 January 2018 - when the FTSE indices rose by around 40 percent from bottom to top.
Who are the winners and losers?
The chart below illustrates the theoretical nominal return on £1,000 invested in each FTSE All-Share sector since the start of 2018. For comparison, we have also included the theoretical return on £1,000 for each sector since the triggering of Article 50 a year ago. You’ll notice that the main outperformers and underperformers remain the same for both.
Article 50 is a clause in the EU's Lisbon Treaty that outlines the steps to be taken by a country seeking to leave the bloc voluntarily. Invoking it kick-started the formal exit process.
Since the start of 2018 no sector would have provided a positive return on your theoretical £1,000 investment.
Of course past performance is no guide to future returns.
FTSE All-Share sector returns (£)
Source: Schroders. Datastream data as at 27 March 2018. Returns are based on FTSE All-Share total returns index. Past performance is not a guide to future performance and may not be repeated.
Miners and financials outperform
Basic materials, which includes mining stocks, has been the best performing sector amid signs that global demand for materials used in construction was holding up. However, you would still have lost £49 on £1,000 invested at the start of 2018.
Financials (including banks) were supported by rising bond yields on the back of the prospect of higher interest rates. Rising yields tend to be better for returns as banks can apply a larger margin on lending and deposit rates. But you would still have been down £58 on a £1,000 investment.
Healthcare, industrials and consumer services all outperformed the broader FTSE All-Share but would still have resulted in losses of £52, £55 and £60, respectively.
An investment in the FTSE All-Share would have lost you £85.
Tech stocks slump
Financials (including banks) were supported by rising bond yields on the back of the prospect of higher interest rates. Rising yields tend to be better for returns as banks can apply a larger margin on lending and deposit rates. But you would still have been down £58 on a £1,000 investment.
Healthcare, industrials and consumer services all outperformed the broader FTSE All-Share but would still have resulted in losses of £52, £55 and £60, respectively.
An investment in the FTSE All-Share would have lost you £85.
Tech stocks slump
Technology stocks have been the worst performing sector, down nearly 27% since the start of the 2018. Tech stocks have also hit turbulence in the US. They had been the driving force for the current bull market. Valuations were high, making a correction more likely. Concerns have also grown that the US industry could be damaged in a trade war.
In the UK, the performance of the sector will have been worsened by events for FTSE 100 software firm Micro Focus. Its share price has more than halved in recent weeks after a series of profit warnings and the departure of its chief executive.
A £1,000 investment in the tech sector at the beginning of the year would have lost you a notional £268.
The same in investment in telecoms, consumer goods, utilities and oil and gas would have cost you £180, £149, £119 and £97 respectively.
Remember, past performance is of course no guarantee of future returns.
In the UK, the performance of the sector will have been worsened by events for FTSE 100 software firm Micro Focus. Its share price has more than halved in recent weeks after a series of profit warnings and the departure of its chief executive.
A £1,000 investment in the tech sector at the beginning of the year would have lost you a notional £268.
The same in investment in telecoms, consumer goods, utilities and oil and gas would have cost you £180, £149, £119 and £97 respectively.
Remember, past performance is of course no guarantee of future returns.
