The remarkable underperformance of the materials sector (see below) which includes both oil and mining stocks, compared to the strong showing of such sectors as industrials and consumer discretionary, indicates how the rally until May was dominated by relatively defensive parts of the market. It is usually the case that stock market rallies are led by ‘riskier’ stocks such as mining companies, technology and financial institutions, as investor confidence regarding the future increases. The non-participation of materials was influenced by declining commodity prices which hurt margins; especially in gold and silver, which saw their values fall to the lowest levels in over two years.
The best and worst
When we look at the performances of individual companies, the picture is just as stark. The five worst performing stocks in the FTSE 100 are all mining stocks, as shown below:
Fresnillo, the Mexican silver miner, saw its share price more than halve during the period. The company is the largest miner of primary silver in the world, meaning that it was bound to suffer heavily. On a valuation basis the share price might look reasonably attractive, with a PE of around 13 and an impressive dividend yield of almost 7%, but the downtrend doesn’t seem to have stopped yet.
Copper miners Antofagasta and Anglo American were victims of a slump in copper prices, which fell to their lowest levels in almost two years. Like Fresnillo, Randgold was caught by the decline in precious metals prices, while ENRC was caught between raw material prices and speculation about a private takeover of the company by Kazakh oligarchs.
By contrast, the five best performing companies were rather more diverse:
Budget airline easyJet could do almost no wrong in the first half of the year. It was a period that saw the orange brand join London’s premier index, after a surge in its share price from the beginning of 2012 carried it from around £4 per share to more than three times that level by the end of June 2013.
Interestingly, International Consolidated Airlines, which owns flag carriers British Airways and Iberia, also enjoyed an impressive performance. Despite long-running problems with Iberia, which has been dogged by industrial action and the poor performance of the Spanish economy, the British Airways portion continues to see its trading improve.
The government’s decision to help first-time buyers get on to the property ladder caused shares of house builders to soar, with Persimmon just one among many that did well. The company reported that trading had improved as a result of the government scheme, with demand rising in the north of England as well as in the south-east, which had hitherto been relatively immune from price declines. With demand only likely to increase in the future, the outlook for Persimmon and the wider sector is still reasonably bright.
Also doing well has been bookmaker William Hill, whose trading conditions improved despite weak consumer spending; this, along with the strong performance of easyJet, is an indication that British consumers are still willing to spend money on leisure time in order to distract them from the difficult conditions at home. Meggitt, which makes aerospace equipment, was also one of the first half of 2013’s best performers, as it reaped the benefits of improved trading and demand for new aircraft across the airline industry.
The last part of the first half of this year saw a spike in volatility, occasioned by fears that the Federal Reserve will begin easing back on its QE3 operations as the US economy shows signs of real improvement. This has come as a shock to investors that had got used to the idea of seemingly unlimited QE, and talk of tapering will be one of the dominant themes of the second half of 2013.
Nevertheless, what the above performance figures show is that many long-standing trends in company share prices will continue, despite gyrations occasioned by macroeconomic concerns. ‘Buy and hold’ is not a strategy to be followed blindly, but with careful use of trend-following it can prove its worth.
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