SINCE the beginning of the year, the FTSE 100 is up 7 per cent, compared to gains below 1 per cent for both the German DAX and the French CAC.
There is a theory that UK equity markets are currently safer than elsewhere in Europe. The Germans have been suffering weaker economic data, their exporters have been hit by the recent euro spike, and there are concerns over the size of Berlin’s final bill for helping periphery Europe. In France, continued labour discontent, changes to tax rules, and nervousness over French bank exposure to the troubled south are all helping to moderate gains. But in Britain, the FTSE 100 is geared towards large, global companies.
This, says Virginie Maisonneuvre of Schroders, explain why the FTSE 100 is such a leveraged play on the global economy. She believes the bond market is indicating that the uncertain Italian election is just a temporary setback.
So where is the FTSE 100 heading? Maisonneuvre expects a short term period of market retreat, in which we head back towards normalisation. She advises buying cyclical stocks, like Rio Tinto, BHP Billiton and BG Group – which, on a five year basis, look very attractive. She also advises anchoring your portfolio with staples (like Diageo), and healthcare (like Roche or Sanofi).
Michael Jarman of H2O Markets expects a FTSE correction of approximately 4 per cent, taking the index to somewhere around 6,000-6,100. If you are trading short term momentum, he recommends covering short positions as we head lower. If the FTSE 100 breaks 6,000, he advises selling into the momentum. For those who don’t wish to sell, Jarman suggests staying defensive and buying yield.
On a separate note, if there is a trend that has been solid since the beginning of the year, it is sterling weakness. The pound is off 8 per cent against the dollar – worrying for those viewing it as a reflection of the state of the UK economy. Maisonneuvre, however, doesn’t see the weakness of the pound as a negative. She points out that, in an environment where inflation remains tame, a weaker pound leads to increased competitiveness. She adds that the severe weakening of the yen has unsettled the traditional currency balances, so the yen is bringing a new element of disruption and debasement to the currency markets. Sterling weakness is not going away.
Louisa Bojesen is the presenter of CNBC’s European Closing Bell. Follow Louisa on Twitter @louisabojesen