The FTSE 100 has just hit its highest level since summer 2018. Our head of investment explains what's driving the latest surge.
European markets have opened cautiously higher, with the FTSE 100 index lifted by JD Sports Fashion (LSE:JD.) which is at the top of the UK index after an upbeat Christmas period for sales. Frasers Group (LSE:FRAS) is also rallying in its slipstream.
Insurance companies Admiral Group (LSE:ADM), Aviva (LSE:AV.) and Legal & General Group (LSE:LGEN) are at the bottom of the UK index after Direct Line Insurance Group (LSE:DLG) scrapped its dividend while Sainsbury (J) (LSE:SBRY) and Barratt Developments (LSE:BDEV) are also underperforming after disappointing updates from both companies.
The World Bank has cut its global growth outlook for 2023 to 1.7% from 3%, forecasting the third weakest year for global growth in thirty years.
After the third consecutive day of gains for the Nasdaq with all three major averages on Wall Street finishing in the green, US futures are pointing to a softer open at lunchtime as markets await key US inflation figures due on Thursday.
JD Sports achieved total revenue growth in the six weeks to 31 December of more than 20%. It expects full-year profit before tax and exceptional items to come in towards the top end of its current market expectations which range from £933 to £985 million. Looking ahead, it expects full-year earnings for the year ending February 2024 to top £1 billion.
The British retailer enjoyed a bumper period of sales over the key Golden Quarter, demonstrating the robustness of demand in the face of pressures from a softening consumer outlook and inflated energy bills.
Sales picked up in the second half of the year, which JD Sports says will help its full-year earnings come in towards the top end of its forecasted range. Its premium brands and North America helped drive the outperformance, highlighting the resilience of consumers at the upper end of the income spectrum to pressures on the cost-of-living.
Shares have suffered over the last year weighed down by the challenging macroeconomic headwinds and the broader equity market volatility, but are trading at the top of the FTSE 100 today.
Barratt Development said its order book on 31 December hit £2.54 billion, considerably lower than £3.79 billion from the same time last year, while its sales rate per outlet per week hit 0.44 homes in the final quarter of 2022, falling sharply from 0.79 in same period in 2021.
Rising mortgage rates, a slowing housing market, build cost inflation and the fallout from the mini-budget have been key headwinds for Barratt Developments in recent months. Investor sentiment is sour towards the sector after a very tough year on the stock market, with shares in Barratt Development down more than 40% over a one-year period. Persimmon (LSE:PSN) is nursing an even more painful share price slump, down by over 50% year-on-year.
Cost-of-living pressures are prompting many potential homeowners to hold off from buying a property as they wait hopefully for mortgage rates and house prices to cool later this year. Although forecasts are for the housing market to soften, a chronic shortage of supply of UK housing is stemming a more aggressive slump.
61.6 million passengers travelled via Heathrow in 2022, 42.2 million higher than 2021 but still 76% of pre-pandemic levels from 2019. The London airport enjoyed a strong Christmas and New Year, with 5.9 million passengers travelling in December.
After the pandemic, when international travel collapsed, Heathrow enjoyed a bounce back this year with a particular boost over the festive season and Christmas school holidays. However, 2022 still had challenges of its own, with the airport hampered by baggage handling issues, strikes, cancellations and delays.
Looking ahead, with China’s economic reopening post Covid, the UK has joined other countries by announcing stricter border controls, requiring a negative Covid test from travellers from China, which looks set to be a near-term challenge for Heathrow. A tail risk comes from another major Covid outbreak if a new variant emerges. Plus, the macroeconomic backdrop of a looming recession and sky-high inflation could weigh on consumer demand for holidays, while the post-pandemic normalisation of Zoom meetings continues to put pressure on business travel.
Direct Line scrapped its dividend for 2022 after forecasting total weather claims of around £140 million, almost double its previous expectations for £73 million. The insurance business also suffered from a 15% drop in its property investment portfolio and an inflation driven increase in its cost of claims over the last quarter. In July, Direct Line issued a profit warning and pushed back its share buyback programme.
Traders are selling the stock aggressively on the back of the abandonment of its dividend, adding to the negativity after a tough year for the business, weighed down by higher-than-expected claims, cost inflation and a slowdown in the commercial property market. Direct Line is on track for its biggest one-day share price drop in its history, shedding more than a quarter of its market valuation, dragging other stocks in the sector like Admiral and Aviva down with it. Shares in Direct Line are down by nearly 45% over a one-year period.
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