Interactive Investor

The stocks responsible for FTSE 100's new high

8th February 2023 15:24

Graeme Evans from interactive investor

It's another day for the bulls as the UK's blue-chip index breaks new ground. Our City writer explains what's behind the buying.

BP broker upgrades and support for retail stocks on optimism that the UK can still avoid recession helped the London market continue its strong start to the year today.

As well as a new all-time high for the blue-chip index, mid-cap investors were boosted by a return to form for the domestic-focused FTSE 250 index after a rise of more than 1%.

Energy stocks featured heavily in the progress of both benchmarks as Brent futures rallied for a third session in a row, driven by demand hopes and a decline in US crude inventories.

Big Oil sentiment also reflected the outlook for shareholder returns after BP (LSE:BP.)’s surprise 10% hike in its fourth-quarter dividend to 6.61 cents (5.48p) alongside a $2.75 billion buyback (£2.28 billion).

The bigger-than-expected distribution wrong-footed City analysts who had been expecting no change in the dividend and a $1.8 billion (£1.5 billion) buyback.

Despite an otherwise underwhelming earnings release, BP shares closed 8% higher last night before rallying another 2% or 9.4p to leave the stock at its highest level since August 2019.

Today’s latest rise followed a flurry of upward revisions to price targets, including by Deutsche Bank after it moved from 549p to 590p and by RBC from 550p to 650p.

Bank of America is among those more cautious at 530p, noting that the results season for Big Oil had concluded with its continued preference for Shell (LSE:SHEL) and TotalEnergies SE (EURONEXT:TTE). It believes BP’s debt position means future payouts carry more upside risks elsewhere.

It added that BP’s ditching of previous commitments to reduce oil and gas production by more than 30% realigned it with Europe’s big energy peers and revived memories of the sector’s pro-cyclical past.

Today’s strong session for the energy sector also saw Tullow Oil (LSE:TLW) rise 1.8p to 36.2p and North Sea-focused explorer Harbour Energy (LSE:HBR) jump by 21.9p to 320.9p in the FTSE 250.

Harbour, the recently merged Chrysaor and Premier Oil business that delivered about 15% of the UK's domestic oil and gas supplies during 2022, is due to post annual results on 9 March.

The company expects to be debt free this year and has said it retains the flexibility for shareholder returns over and above its stated $200 million (£162 million) annual dividend.

The oil pair were joined on the FTSE 250 risers board by shopping centre owner Hammerson (LSE:HMSO) and electricals retailer Currys (LSE:CURY) after the National Institute of Economic and Social Research (NIESR) said the UK is likely to avoid a technical recession in 2023.

However, GDP growth is set to remain close to zero and the independent research body added that middle-income households will face a hit to their personal disposable income ranging from 7% to 13% and reaching up to £4,000 in the financial year 2022-23.

In the FTSE 100 index, Next (LSE:NXT) rose 176p to 6902p and JD Sports Fashion (LSE:JD.) sustained its year-to-date rise of more than 40% by adding 2.6p to 182p.

Sentiment was also helped by an update from Barratt Developments (LSE:BDEV) as the housebuilder reported early signs of improvement in trading during January. Persimmon (LSE:PSN) rebounded 49p to 1,513.5p and Taylor Wimpey (LSE:TW.) cheered 2.4p to 123.3p, leaving it at levels last seen in August.

Among smaller stocks, industrial chains and power transmission business Renold (LSE:RNO) stood out after it forecast annual operating profit will be above current market forecasts.

The AIM-listed shares jumped 2.9p to their highest since July at 27.4p as Renold reported 25% growth in turnover to £199 million for the 10 months to 31 January. It also highlighted a strong order book, the benefits of cost reduction and efficiency programmes and successful recovery of cost inflation on raw material and energy.

Broker Peel Hunt described a valuation of five times earnings as an opportunity and said its target price of 49p was “a realistic assessment of the company’s medium-term potential”.

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