Sterling strength is bearish for FTSE 100, bullish for FTSE 250

By
A A A

Summary

  • The profit outlook is weakening for UK large-cap equities. Accordingly, consensus is downgrading the outlook for FTSE 100, while keeping it robust for the FTSE 250.
  • Overhanging the gloomy sentiment in UK’s large-cap equity market is the appreciating sterling and the threat of higher interest rates as the BoE prepares to tighten monetary policy. As large-cap earnings come under pressure, the outlook is bearish for the FTSE 100.
  • In preserving the Funding for Lending Scheme for SME (while ending it for households), the BoE’s careful rebalancing act is a signal of calibrating monetary policy toward supporting UK’s domestic focused businesses. The outlook is bullish for domestic secular growth stories captured in the FTSE 250.
  • Investors who share this sentiment may consider, amongst the Boost equity ETPs product platform (www.boostetp.com/products), the following positions in UK equities:

Long positioning UK mid-cap equities:

1. FTSE 250 2x Leverage Daily ETP (2MCL)

Short positioning UK large-cap equities:

2. FTSE 100 3x Short Daily ETP (3UKS)
3. FTSE 100 2x short Daily ETP (2UKS)
4. FTSE 100 1x Short Daily ETP (SUK1)

Sterling strength undermines sentiment in FTSE 100

The appreciating sterling and rising interest rates are putting the profit outlook of UK multinationals under further pressure. After falling short of earnings expectations since the summer, consensus may look to downgrading the outlook for UK large-cap stocks more aggressively, undermining sentiment in the FTSE 100. This, amidst resilient earnings expectations within UK’s mid-cap equities. Evidence of accelerating broad-based UK growth is bolstering a bullish outlook for domestic, secular plays captured in the FTSE 250. Investors who share this sentiment and seek exposure in UK equity markets, may consider the following long and short positions:

Long positioning UK equities:

1. FTSE 250 2x Leverage Daily ETP (2MCL)

Short positioning UK equities:

2. FTSE 100 3x Short Daily ETP (3UKS)
3. FTSE 100 2x Short Daily ETP (2UKS)
4. FTSE 100 1x Short Daily ETP (1UKS)

In its clearest signal yet that the rebounding UK economy is gaining momentum, the BoE ended the Funding for Lending Scheme to households in a pre-emptive strike to cool the housing market which, following the government’s introduction of the Help to Buy Scheme, has gained further support and is seen at risk of overheating. In redirecting the Funding For Lending scheme to SMEs, the BoE is not only signalling its reluctance to engage in full scale tightening cycle just yet, it importantly also is seeking to preserve loose credit conditions for the corporate sector for as long as possible. This should reassure investors that the growth outlook for UK domestic focused companies near term will continue to be supported by the BoE and why a turn in the cycle towards higher UK interest rates should not undermine the bullish sentiment in domestic growth stories captured in UK’s mid-cap equity market.

In fact, the FTSE 250 has weathered the rise in bond yields as a result of the taper talk better than their stock peers in the large cap space. To date the FTSE 250 has risen almost 25%, about double the performance of the FTSE 100. Driving the overwhelming support of UK’s smaller capitalisation stock market is the strengthening UK economy that is enjoying both top and bottom line growth. In contrast, UK’s multinationals have sustained their profits this year largely through restructuring, with asset disposals and layoffs helping to preserve dividends. At the same time, little if anything has been achieved to revive top line growth.

The irony is that as the UK economy accelerates, it is the appreciation of the sterling that has started to undermine sentiment in UK large cap equities. With more than 60% of revenues of non-financial stocks in the FTSE 100 coming from overseas markets, the appreciation of the pound, if not reigned in, is set to deteriorate the near term profit outlook of many UK multinationals. After reaching lows in July, sterling has appreciated by 10% against the dollar and by 5% against the euro. Setting the stage for potential further sterling appreciation is the ongoing broad-based improvements in producer sentiment, with the latest PMI readings indicating output expanding in manufacturing, construction and services. Not helping the sterling to remain weak is the expectation of higher UK policy rates. When set against the latest 0.9% CPI reading in the Eurozone, the prevailing risks to deflation may compel the ECB to further policy rate cuts and in so doing, widening the interest rate differential between the UK and the Eurozone. This tilts the fundamentals further in favour towards the pound strengthening relative to the euro.

Sentiment on UK’s multinationals is souring. Having disappointed the market in Q3 after falling short of expectations in Q2, consensus appears to have underestimated the extent to which the pound has risen. This despite downgrading the 12 month earnings outlook for FTSE 100 stocks since July by 20% (see chart on previous page).

Given large-cap’s earnings to be driven by more export-oriented revenues, more generous dividend policies and a more financially geared balance sheets than the mid-cap stocks in the FTSE 250, the FTSE 100 is more vulnerable to higher interest rates and stronger sterling FX rates. Hence, at a time when expense debt refinance and weakening exports are undermining the financial performance of FTSE 100 stocks, the stocks in the FTSE 250 have remained largely insulated from such macro forces. If the consensus of the 34 companies covered in the FTSE 250 is anything to go by, then the stable trend seen in 12 month earnings expectations may help justify the premium valuations assigned to UK mid-cap equities and with it, sustain the rally into December.

An opportunity may arise for investors to consider a pairs trade:

  1. A bearish bet on the FTSE 100, using a short FTSE ETP. Investors with a high risk tolerance may consider a short with a high leverage factor, such as the Boost FTSE 100 3x Short Daily ETP (3UKS) while investors looking for a lower risk strategy, possible with the aim of hedging their long UK large cap equity portfolio, may also consider the 2x (2UKS) or 1x (1UKS) Short ETP on the FTSE 100.
  2. A bullish bet on the FTSE 250, by buying the Boost FTSE 250 2x Daily Leverage ETP (2MCL)

Disclaimer

This communication has been provided by Boost ETP LLP which is an appointed representative of Mirabella Financial Services LLP which is authorised and regulated by the Financial Conduct Authority.

The products discussed in this document are issued by Boost Issuer PLC (the “Issuer”) under a Prospectus approved by the Central Bank of Ireland as having been drawn up in accordance with the Directive 2003/71/EC. The Prospectus has been passported from Ireland into the United Kingdom and is available on the websites of the Central Bank of Ireland and the Issuer. Please read the Prospectus before you invest in any Exchange Traded Products (“ETPs”).

Neither the Issuer nor Boost ETP LLP is acting for you in any way in relation to the investment to which this communication relates, or providing investment advice to you. The information is not an offer to buy or sell or solicitation of an offer to buy or sell any security or investment. You are advised to seek your own independent legal, investment and tax or other advice as you see fit.

The value of an investment in ETPs may go down as well as up and past performance is not a reliable indicator of future performance. An investment in ETPs is dependent on the performance of the underlying index, less costs, but it is not expected to match that performance precisely. ETPs involve numerous risks including among others, general market risks relating to the relevant underlying index, credit risks on the provider of index swaps utilised in the ETP, exchange rate risks, interest rate risks, inflationary risks, liquidity risks and legal and regulatory risks.

ETPs offering daily leveraged or daily short exposures (“Leveraged ETPs”) are products which feature specific risks that prospective investors should understand before investing in them. Higher volatility of the underlying indices and holding periods longer than a day may have an adverse impact on the performance of Leveraged ETPs. As such, Leveraged ETPs are intended for financially sophisticated investors who wish to take a short term view on the underlying indices. As a consequence, Boost ETP LLP is not promoting or marketing Boost ETPs to Retail Clients. Investors should refer to the section entitled "Risk Factors" and “Economic Overview of the ETP Securities” in the Prospectus for further details of these and other risks associated with an investment in Leveraged ETPs and consult their financial advisors as needed.

This marketing information is derived from information generally available to the public from sources believed to be reliable although Boost ETP LLP does not warrant the accuracy or completeness of such information. All registered trademarks referred to herein have been licensed for use. None of the products discussed above are sponsored, endorsed, sold or promoted by any registered trademark owner and such owners make no representation or warranty regarding the advisability on dealing in any of the ETPs.



The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.



This article appears in: Investing , ETFs , Banking and Loans , Business

Referenced Stocks:

Boost

Boost

More from Boost:

Related Videos

Stocks

Referenced

Most Active by Volume

48,099,947
  • $16.09 ▲ 0.50%
40,277,806
  • $102.50 ▲ 0.24%
40,236,499
  • $19.57 ▲ 2.35%
31,092,510
  • $49.75 ▲ 0.65%
30,795,218
  • $34.92 ▲ 0.78%
29,910,855
  • $3.63 ▲ 0.83%
24,019,154
  • $13.06 ▼ 0.38%
23,753,906
  • $74.82 ▲ 1.31%
As of 8/29/2014, 04:04 PM

Find a Credit Card

Select a credit card product by:
Select an offer:
Search
Data Provided by BankRate.com