Hargreaves Lansdown looks ahead to 2008
The mini-meltdown in March and the ensuing US sub-prime fallout resulted in a difficult year for the FTSE100. As at mid-December, the FTSE was showing a small gain for the year of around 5.4%, a creditable performance given the wider global picture.
For 2008, continuing concerns regarding the full extent of credit write downs are likely to weigh heavily on shares, particularly for the first six months of the year. Global markets will also be hoping that the US can avoid falling into recession, whilst in the UK the economic outlook remains balanced on a knife edge. Meanwhile, the retailers are well aware of the potential stalling of consumer demand and will therefore be looking to the Christmas season to at least provide them with a strong start to what could otherwise be a challenging year.
Richard Hunter, Head of UK Equities at Hargreaves Lansdown Stockbrokers, comments:
”2007 has seen a mix of fortunes for the FTSE100, with strength in the mining and oil sectors overshadowed by some underperformances in the financial and property sectors in particular. For 2008, sectors which investors may watch with interest include the banking sector, whose share prices have largely been adjusted to a worst case scenario which may not materialise, and the pharmaceutical sector, which is showing some signs of returning to favour after a long period in the doldrums.
Notwithstanding that the unusually volatile year we have just witnessed could well be repeated next year, our estimate for the end of 2008 is that the FTSE will be up at 6900.
Mr Hunter continues: “Investors looking for specific stocks might like to bear in mind the potential return to fashion of large cap stocks. In addition, general market volatility looks set to continue and, as such, we may see heightened demand for defensive shares. With this in mind, BP remains a core holding despite its recent troubles, Tesco has the hallmarks of being a defensive stock, yet still with growth aspirations, whilst British American Tobacco is a classic defensive play.”
BP – As expected, the recent difficulties in the production and refining areas materially affected profits for the latest quarter. This being said, the new CEO had managed investors’ expectations to accept such numbers, and as such the initial reaction to the news was quite upbeat.
The proposed streamlining of operations was also well flagged in advance and the recent oil price highs should underpin performance, along with the resumption of projects such as the Gulf of Mexico, Thunder Horse and, in the foreseeable future, the Texas refinery, which should return to full capacity.
The challenges may not be over but at least the rot seems to have been stopped. The shares appear to have weathered the worst of the storm, and now stand up 10% over the last six months. Whilst the market is well aware that there is still much work to be done, the current consensus is positive.
Tesco – It certainly seems as though the world is Tesco's oyster at the moment.
Without taking its eyes off the core UK market - where all the key performance indicators continue their inexorable growth - the success of its international division continues apace, with a flagship Chinese store and the US roll-out yet to make their own notable contributions.
The recent doubling of the share buyback programme to £3 billion will add further support to the shares, whilst on past performance the Christmas period could give yet another boost to prospects. As the Tesco juggernaut continues to fire on all cylinders - and despite a 24% hike in the share price over the last year - the market view towards the shares remains resolutely positive.
British American Tobacco – Not only is the group increasing sales in the emerging economic regions to counterbalance the threats to its traditional marketplaces (and at generally higher prices), it is also looking to use the lower cost wages of such regions. The impending (and planned) higher marketing spend will affect performance in the fourth quarter, as will price increases particularly in Brazil. The currency headwinds of the US Dollar, in which around 40% of its profits are generated, will be another challenge.
BATS' marketing ability, the sheer size of its operations and a keen eye for cost containment are all underlying positives. The shares are supported by an ongoing buyback programme and display defensive qualities which could be of advantage to investors during a potentially volatile 2008. The general market view is that the company is a buy and comfortably the most preferred play in the sector.
Sectors to watch
- Banks
On average – and with the exception of Standard Chartered, the only major UK bank to have posted a gain – the leading banks lost nearly 25% in the last six months of 2007. The ongoing uncertainty surrounding sub-prime exposure will no doubt continue into the New Year, but the recent trading statements and forthcoming annual results may do something to stem the negative flow. On the whole, the banks have enough firepower to weather this storm and, in addition, the recent share price falls have at a stroke factored in an extremely poor scenario, whilst at the same time throwing out some attractive p/e ratios and punchy yields. The more adventurous investor may be using these uncertain times as a buying opportunity.
- Pharmaceutical stocks
The weakness of the pharmas over the last few years has been due to the twin drags of the lack of new blockbuster drugs, with little visible in the pipeline, along with the imminent patent expiries on a number of existing drugs, thus removing a core income stream. Nonetheless, the long term story of higher margin specialist drugs for an ever ageing global population remains intact, whilst it appears that Western medicine is starting to become more accepted in Asia, and China in particular. The fact that the larger companies have more recently been refining costs to improve margins should also bolster prospects going forward.
Index/share prices as at close of business Friday 7 December 2007 – FTSE100 6555, BP 619.5p, Tesco 477.25p, British American Tobacco 1911p
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