Is the FTSE 100 in danger of topping out?
Is the FTSE 100 likely to outperform its peers in 2023 just as it did in 2022 or has the value versus growth trade come to an end?
2022 has been a good year for the FTSE 100 but will it also outperform in 2023?
Along with India and Brazil’s stock markets the FTSE 100 outperformed other global equity indices in 2022 and ended the year in mildly positive territory but is this outperformance likely to continue in 2023?
Whereas the Euro Stoxx 50 and S&P 500 last year saw double digit declines, value stocks have been the FTSE 100’s saviour with energy and mining stocks propping up the index.
With oil and especially gas prices having swiftly come off their lofty heights, upcoming fourth-quarter earnings reports for the likes of BP, Shell and Centrica are likely to be the last strong ones and may represent the peak of a cycle.
According to Bloomberg Intelligence, with BP and Shell alone accounting for about a quarter of the FTSE 100 earnings-per-share (EPS) and consensus for the pair having retreated by about 15% since a September peak, the strong 2022 FTSE 100 per-share profit is under threat and is likely not be replicated this year.
Miners such as Anglo American, Glencore and Rio Tinto’s earnings expectations are also turning negative, although to a lesser extent.
Furthermore, the strong 20% recovery in the British pound from last year’s $1.0350 low could weigh on EPS from pharmaceutical and staples stocks, which account for about 30% of the FTSE 100 and have a high proportion of foreign revenue.
On home turf, lingering high inflation, the cost-of-living crisis and rising mortgage rates due to the Bank of England’s hawkish policy are also likely to weight on UK stocks this year with several analysts having revised down their 2022 EPS estimates since the start of the fourth quarter with the number of cuts to forecasts outpacing the number of upgrades.
Having said that, UK stocks remain extremely cheap with their relative performance being heavily correlated to the direction of the value versus growth trade.
The MSCI UK Index, which covers around 85% of the free float-adjusted market capitalisation in the UK, trades at around a 35% discount to its global peers, well below the 15-year average of 18%.
According to Bank of America’s global fund managers’ survey for January a net 54% of respondents think value will beat growth stocks this year, like last year, a rise of 14 percentage points versus December and the highest reading since June.
Technical analysis may shed further light on the FTSE 100’s future performance
Even though the FTSE 100 kicked off 2023 on a strong footing with a year-to-date performance of around 2.75%, it nonetheless underperformed European and US indices such as the Dax 40, Nasdaq 100 and S&P 500 which rose by around 7.5%, 8.75% and 5.00% respectively.
Year-to-date performance of major European and US stock indices
The FTSE 100 thus so far only outperforms the Dow Jones Industrial Average with an around 1.8% year-to-date positive performance.
The UK blue chip index rose by 4.5% in the first couple of weeks of the year and came close to its May 2018 all-time high but faltered below the minor psychological 7,900 mark before giving back around half of its early January gains over the past few weeks.
Over the next few days, a further slide towards the December-to-January uptrend line at around 7,630 and the November and December highs at around the 7,600 level may be witnessed but as long as this support area underpins, the medium-term uptrend remains intact.
Only a pronounced slide by over 6% from current levels to below the early January low around the 7,400 mark would lead investors to question the validity of the medium-term uptrend.
Failure at this low on a weekly chart closing basis and at the next lower December low around 7,300 would most likely spell the end of the October bull run.
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