By Michelle McGagh of Citywire
As the FTSE 100 marks the New Year by hitting all-time highs, investors will be hoping that the old adage ‘as goes January, goes the year’ hold true.
The UK blue-chip index has closed at an all-time high for six days in a row, the longest streak of records since 1997. Should it end the month higher, investors who place their stock in history will be eyeing the ‘January effect’, which has seen the FTSE 100 end the year higher in 15 of the 19 years when it started with a positive month.
‘That’s a 79% success rate, which suggests that there might be more to this than mere chance,’ said Tom Stevenson, investment director at fund group Fidelity International.
However, he noted that the adage did not hold true last year, when fears over China sent the FTSE 100 tumbling in January before a recovery took hold, taking the index to new heights by December.
Stevenson said there would be a ‘two-way pull’ on the FTSE 100 this year. On the one hand the growth outlook is positive in both the UK and US and bond yields are expected to rise modestly, making equities more appealing. However, offsetting this optimism is political uncertainty in the UK, US and Europe, which faces a number of elections.
On balance, Stevenson said ‘the post-2009 bull market is long in the tooth but I expect it to continue this year’.
Jason Hollands, managing director of Tilney Bestinvest, said sentiment had turned from fear to hope by the end of 2016 as markets proved resilient to the upheaval.
He said far from the ‘doom-laden predictions’ that the UK would enter recession after Brexit, the economic data had been robust ‘with clear evidence of a fillip to exporters from the weaker pound and a boost to manufacturing’.
The FTSE 100 has also benefited from rising crude prices, spurred by the Opec cartel of oil-producing nations to limit supply.
‘More broadly, the outlook for dividends for largely international FTSE 100 companies, which collectively earn around three-quarters of their earnings outside of the UK, has improved due to the currency benefit of translating these back into sterling,’ said Hollands.
Across the Atlantic, concerns about Trump’s election have subsided in what Hollands described as ‘an epiphany moment’ and ‘aggressive tax cuts, shock and awe infrastructure investment and the slashing of banking red tape has got investors salivating about the potential big boost to US growth’, as well as the potential for share buybacks.
Although the signs look good for investors in 2017, Hollands said it was important ‘not to get swept up by excessive bullishness about 2017’.
China’s growing debt pile still remained a concern and share valuations were ‘far from cheap’, he said. Hollands also said central bank support may start to be removed, while elections in Europe could throw up further political shocks.
Graham Spooner, investment research analyst at The Share Centre, said investors should ‘continue to expect the unexpected in 2017’ and ‘trust their instincts’ on whether they feel the index has gone too far.
‘A number of stocks have reacted to recent events; for example, share prices have already reflected the potential good news of a pro-business US president and this has particularly benefited internationally focused companies,’ he said.
‘As an investor you need to ask yourself how much this has already been priced in.’
He added that rising commodity prices and currency movements played a big part in the fate of the FTSE 100 but were ‘notoriously hard to predict’.
For investors who have faith that the FTSE has more to go, Spooner recommended financial stocks, such as St James’s Place (SJP) and Experian (EXPN) as ‘medium-risk picks’ and Paysafe (PAYS) ‘at the higher end of the risk spectrum’.
‘The mining sector had a good 2016 and is geared for growth, with our picks including Rio Tinto (RIO), Amerisur (AMER), Vedanta (VED) and Randgold Resources (RRS) – all for investors willing to take a higher level of risk,’ he said.