British blue chips are up, but the recession could torpedo the outlook | FTSE

Britain’s stock market has its detractors, who have derided it over the years as a fuddy-duddy collection of “19th century companies”, and have even called it a jurassic park index for its lack of peak members.

But each dinosaur has its day and, much like the jurassic park franchise, the FTSE 100 Blue Chip Stock Index has seen something of a resurgence in 2022.

While most stock markets took a beating, the FTSE managed to rise around 1% – not a gigantic increase, but more than enough to eclipse its rivals. The US S&P 500 is down 14% since early January as rising interest rates punctured the euphoria in tech stocks. Germany’s Dax fell nearly 19% as fears of energy shortages sent German consumer confidence plummeting to historic lows.

The FTSE 100 has actually been kept afloat by some of the old economy companies looked down upon by growth investors. Oil giants BP and Shell defied general market volatility: their shares rose nearly 40% as they profited from the spike in gas and oil prices caused by the war in Ukraine.

Arms maker BAE Systems is the top FTSE 100 this year, up nearly 50% as the Russian invasion heralds increased orders for military kits from governments.

“Banks such as HSBC and Standard Chartered also outperformed, helping to support the FTSE 100 as higher interest rates improved net interest margins,” said Victoria Scholar, chief investment officer at Interactive Investor. Tobacco companies such as Imperial Brands and British American Tobacco also performed well, rallying nearly 14% and 25% respectively.

Exporters have been helped by the weakness of the pound sterling, which has lost 12% of its value this year as the outlook for the UK economy has deteriorated. The outlook for the pound is also poor, with an 80% increase in the energy price cap in October likely to affect the currency.

Wednesday will see the quarterly reshuffle of the FTSE 100, with asset manager Abrdn looking set to be relegated to the smaller FTSE 250 index after a 40% drop in value this year.

“Enormous geopolitical uncertainty, soaring inflation and concerns over economic growth have challenged the asset management industry,” says analyst Susannah Streeter of Hargreaves Lansdown.

Other potential candidates for relegation are generic drug maker Hikma Pharmaceuticals, whose sales are being hit by fierce competition, and kitchen maker Howden Joinery, as the cost of living crisis deters people from going into home renovations.

Medical company ConvaTec, which makes wound and skin care products, and F&C Investment Trust are the first to be promoted to the FTSE 100. The reshuffle will depend on next Tuesday’s closing prices.

Mike Ashley’s Frasers Group had also been tipped for promotion from the FTSE 250 to the top table. Its shares hit a 10-year high in July after revealing record profits made when the reopening of stores after the lockdown drove up sales.

However, North Sea oil and gas producer Harbor Energy edged out Frasers, after reporting a 12-fold increase in pre-tax profits in the first half of this year.

But the outlook for the UK and European markets remains clouded by uncertainty: record energy prices and possible gas rationing could plunge European economies into a deep slowdown. As inflation heads into double digits in the eurozone – and already above double digits in the UK – consumers are facing very steep declines in real income, which will squeeze spending sharply.

Mark Dowding, chief investment officer at BlueBay Asset Management, fears that the impending recession in Europe could be as severe, in economic terms, as that seen after the Great Financial Crisis of 2008. troops and pushing for peace, this whole prospect could spin in the air,” he adds.

The broader outlook could also hinge on how long the Federal Reserve will raise U.S. interest rates, despite fears the U.S. could slide into recession.

Fed Chairman Jerome Powell struck a hawkish tone last Friday, telling the economic symposium in Jackson Hole, Wyoming that borrowing costs need to stay at growth-stifling levels “for a while,” to tame the soaring cost of living. “These are the unfortunate costs of reducing inflation,” he said.

This will likely spell hardship for households and businesses – another sign that winter could be tough.

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