Company-specific issues are being touted as the main reason for FTSE 100 falling back below the 5,00...
Company-specific issues are being touted as the main reason for FTSE 100 falling back below the 5,000 mark recently. While it may fall back further, the more defensive areas that make up the bulk of the index are all showing solid earnings growth.
Tom Elliott, strategist at JP Morgan Fleming Asset Management, says the fall in the FTSE 100 to 4,920 was led by specific problems at GlaxoSmithKline and Vodafone, which together make up about 12%-13% of the index.
The more defensive areas of the index ' namely beverages, retailers, industrials and banks, which make up the bulk of the index by number ' are all seeing earnings increases, says Elliot. He adds: 'We are looking for improvements in certain stocks before the FTSE can get going again, but the rest of the companies in the FTSE will support the index. If it does fall to 4,500, it will also be a good opportunity to buy.'
During the summer months, Elliot says liquidity always tends to dry up as brokers go on holiday and it is easy for one piece of bad news to send a stock tumbling.
Andy Brough, UK fund manager at Schroders, says the falls in the FTSE 100 were also down to the continued weakness in the US and disappointing earnings.
He says the market will continue to drift and is not bullish on large companies, as he believes you only buy these stocks when the market is growing. Brough adds that the value in the UK at present is outside the FTSE 100, with Schroders' UK funds currently concentrating on government and consumer spending stocks.
Martin Cholwill, UK Equity fund manager at Axa Investment Managers, says it is not uncommon at this stage in the economic cycle for companies to go wrong unexpectedly, drawing attention to Polly Peck and Maxwell in the 1990s.
'But if you're looking ahead six months, there are more positive factors in the background, such as recovery in the underlying economy and positive lead indicators, such as robust consumer spending and low interest rates,' he says.
'Such things will have a positive impact on the economy in due course,' says Cholwill.
He agrees the fall in the FTSE has been company specific and believes that the key to success in the present market environment lies in picking stocks. Against such a background, he says investors would be wrong to focus entirely on defensives.
He says: 'I don't know whether defensives can lead the market up from here. What investors need to look at is some of the economically sensitive areas, such as financials, which I believe will perform better in stock market terms when the market improves, as the value is in their own investment and so rising markets help them.'
Big sectors such as oil, which are steady, predictable cashflow generators, are also the ones to look at, says Cholwill, adding that there is even some scope for companies such as Vodafone to recover.
'That is not a normal stock pick but an example of the kind of company that may outperform in a market rally when the big liquid FTSE companies start to lead the market upwards,' says Cholwill.
Buy potential on back of any FTSE fall.
Financials should perform well.
Oil caps offer steady cashflows.
Market still looking for improvements in FTSE.
Further index fall possible.
Defensives may have peaked.
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