Lowes Magazine Issue 125

DOUG’S DIGEST

Looking under the bonnet

companies registered in the UK, was one of the few major stock market indices to produce a positive return. The chart not only shows different equity indices from around the world, but also different asset

THE UK ECONOMY CONTRACTED IN THE THIRD QUARTER of 2022 and is widely expected to have done the same in the fourth, signaling an official recession, which most economists expect to continue for a large part of 2023. As with most developed regions, the UK is struggling with high inflation, initially caused by loose monetary policy during the Covid lockdowns, and then exacerbated by the war in Ukraine. Central Banks have responded by quickly raising interest rates, with the intention of slowing growth and dampening demand. With such a gloomy outlook, it is surprising to discover that over 2022 the FTSE 100 index, which measures the 100 largest

classes as well, with indices measuring UK and global fixed interest as well as UK property. Negative returns across the board like this are a rare occurrence, and last year was a difficult year for investors, which makes the performance of the FTSE 100 index stand out all the more. So, what were the biggest UK companies doing right compared to the rest?

2022 Total Return - Local Currency

Source: FE Analytics. Total Return. Local currency

10 5 0 -5

-10 -15 -20 -25 -30 -35

FE UK Property Proxy

Deutsche DAX 30

Nasdaq

S&P 500

FTSE 100

FTSE 250

ICE BofA UK Gilts All Stocks

ICE BofA Sterling Corporate

ICE BofA Global Corporate

Fixed Interest ICE BofA Sterling High Yield

ICE BofA Global High Yield

Nikkei 225

Composite

TSE TOPIX

Hang Seng

MSCI UK IMI Core Real Estate

MSCI World

ICE BofA Global Government

France CAC 40

Euro STOXX 50

Equity

Property

As always when it comes to investing, it is important to understand just what is going on underneath the bonnet. Of the 100 biggest companies at the start of 2022, 98 made it to the end of the year with two being taken over. Of those 98, only 23 saw their share price rise, with the other 75 falling in value. There was further clustering within the positive companies as well, with 8 being mining or oil and gas companies, benefitting from the re-opening of the world’s manufacturing economy leading to an increased demand for basic materials, plus the war in Ukraine restricting the supply of oil and gas from Russia. A further four were financial services companies, benefitting from rising interest rates around the world. It is clear, therefore, that the make-up of the index of the top 100 UK companies has benefitted from global geo-political events, but with so few actually growing their share price it is still confusing for some that the index managed to give a positive return over the year. The important thing to remember is that the FTSE 100 index is weighted depending on the size of the companies involved. Shell plc, for example, is only one company but its size means it accounts for over 9% of the FTSE 100 index (as at the end of September 2022). BP similarly accounts for 4.51% of the index. In fact, the 23 companies which grew their share price in 2022 account for approximately 58% of the index, so the movement in their share price has a much bigger effect on the overall index performance than the other 75 companies.

For structured products, where the ultimate return is linked to the performance of the underlying index, selection of that index is an important consideration. Over recent years we have seen products coming to the market linked to a variety of different indices, such as the FTSE 150, FTSE 100 Equally Weighted and FTSE 100 Total Return with a fixed percentage dividend withdrawal, to name but a few. Whilst we have adopted the use of one new index, the FTSE CSDI index, this was only after careful research to be sure we fully understood how it worked and the reasoning behind its use as an alternative. Others we stayed away from, despite the attractive returns on offer. Although these indices can seem very similar on the surface, their returns can vary dramatically. For example, despite the FTSE 100 index delivering a total return of 4.7% over 2022, the equally weighted version of the index, made up of the same companies but with each contributing equally to the index return, fell by 12.9% over the same period. In times like last year it is difficult to produce positive investment returns even with the most well diversified portfolio. When one asset class or region is standing out like the largest UK companies did last year it can be tempting to chase those returns, but it is important to understand exactly why they are performing like they are and remain disciplined, avoiding ending up with all your eggs in one basket when fortunes could quickly change.

Constituent list from FTSE Russell website Performance from FE Analytics. Price Return

12 month price return for each company in the FTSE 100 at start of 2022

80 60 40 20 0

-20 -40 -60 -80 -100 Percentage change in share price

Lowes Financial Management and Lowes Investment Management are authorised and regulated by the Financial Conduct Authority Visit: www.Lowes.co.uk | Call: 0191 281 8811 | Email: enquiry@Lowes.co.uk

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