FTSE 100 suffers correction, but should you be worried?

Richard Hunter, head of markets at interactive investor, talks through the latest stockmarket sell-off and also looks under the bonnet of former high-flyer WH Smith.

Wall Street weakness initiated this domino effect, with Asian markets dropping sharply and European markets playing catch-up in early trade. 

In the absence of a specific trigger, investors are currently voting with their feet due to mounting concerns around trade tensions and the impact on global growth, higher interest rates in the US, and a potential rotation away from equities due to rising bond yields.

US tech stocks inevitably bore the brunt of the sell-off overnight, having been at the vanguard of US market strength over the last year. Netflix and Amazon, for example, had both seen their share prices double and a pause for breath was a matter of time. 

In the UK, even prior to yesterday's sell-off, the FTSE 100 had lost 6% in the year to date, as Brexit uncertainty and a relatively strong pound pinned down shares whose earnings largely emanate from overseas.

For the moment, no trend has been established and, despite some minor headline hysteria, nothing fundamental has changed. Recent IMF comments added weight to concerns on global growth, and further pressure could come to bear later in the day if the US inflation number confirms the probability of hawkish monetary policy.

Source: TradingView (*)      Past performance is not a guide to future performance

The double-edged sword which is the WH Smith business has again played out in its final results.

The higher margin, almost monopolistic presence which its Travel business supplies in airports, train stations and motorway services, has again borne fruit, with revenues 8% higher and trading profit up 7%. 

Its increasingly important contribution to the WH Smith brand, both domestically and internationally, is a clear centre of strategic focus for the group and continued investment is most likely.

Meanwhile, the High Street business remains a thorn in the side, with revenues and trading profit both down 3%. Cost savings and a sharp focus on margin management are the main constituents of a defensive strategy as the wider retail sector has shown signs of buckling under pressure. In the meantime, the cost of a review of this division is an additional weight.

Source: TradingView (*)      Past performance is not a guide to future performance

The 13% increase in the final dividend will add some attraction to a currently light yield of 2.4%, while the share buyback should give at least some support. However, today's wider market weakness and general valuation concerns are clearly taking precedence over any rays of light which the company is displaying.

Prior to today's drop, the shares had been struggling to make significant progress, losing 0.6% over the last year which compares to a 4.5% decline for the wider FTSE 250. The opposing fortunes of the Travel and High Street businesses has proved enough to neutralise the market consensus, which comes in at a hold, albeit a strong one.

*Horizontal lines on charts represent previous technical support and resistance. Diagonal blue line of first chart is FTSE 100 uptrend since 2016 low.