Commodity-based companies have overtaken financial services as the ‘bell-weather' of London equities, according to Fidelity UK Growth manager Tom Ewing.
Natural resources edged ahead of banks in FTSE 100 weighting in April, with around 16% of the blue-chip index now invested in mining and basic resources companies – slightly ahead of banking stocks.
Furthermore, £100 in a FTSE 100 tracker would see £35 go into overall commodities, with just £23 invested in the wider financial services sector.
“Although the financial sector is often viewed as a bell-weather of the UK stock market, companies with commodities at their core are now arguably more representative of the health of London equities,” Ewing says.
However, Ewing believes the rise of natural resources and energy companies has weakened the relationship between the London stock market and the UK domestic economy.
FTSE 100 companies now attribute only 36% of revenues directly to the UK, with Europe and the US accounting for a large portion of sales.
Ewing says calling the mining sector correctly is the critical decision for investors this year.
“The FTSE 100 contains the four big global diversified miners – the kind of leadership we don’t have in other industries – other than under-capitalised banks,” he says.
“Recent strong performance by the mining stocks has reversed a sustained period in the doldrums.
“In my view, the outlook for natural resources companies continues to be positive, thanks to demand for metals and other materials in Asia.
“The fact is that supply cannot cope with such unexpected massive demand.”IFAonline
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