After a disastrous pandemic-hit year which saw dividend payments slashed, what does 2021 hold in store for the FTSE?
- The FTSE 100 should get a boost from the UK and EU agreeing on a trade deal
- AJ Bell has forecast FTSE dividends rising by £10.9bn this year to £70.8bn
- Some analysts think oil firms will thrive despite the growth of renewable energy
By all measures, the FTSE 100 index had a terrible year in 2020.
While Wall Street’s Nasdaq and S&P 500 flourished as America’s economy ailed, climbing 42 per cent and 15 per cent respectively, the value of Britain’s blue-chip index fell 14 per cent – its worst annual performance since 2008.
Hope is on the horizon though. Vaccines have been developed and stock markets have boomed as investors grow more confident the global economy will open up again and return to some form of sanity.
Since its March low-point, the FTSE 100 has now risen by over a third, with tech-focused companies such as Ocado and Tesla backer Scottish Mortgage Investment Trust doing strongly.
Since its March low-point, the FTSE 100 has now risen by about a third, with tech-focused companies such as Ocado and Scottish Mortgage Investment Trust doing strongly
But will those firms continue to soar during 2021? And what about the FTSE players that have were knocked for six by the pandemic – the oil supermajors and banks had an especially rough 2020.
Hinesh Patel, a portfolio manager at Quilter Investors, says that whatever happens, the next 12 months will likely be a challenge for the index, with bouts of volatility and further coronavirus restrictions continuing to hamper demand.
He notes: ‘The Covid-19 crisis has shown the FTSE 100 contains a lot of legacy businesses which may struggle in the new consumer environment, and as such we see potential for the index to be flat or lower during 2021.
‘The FTSE 100 would be in a far worse place right now if it weren’t for technology and commodity firms, so there is potential for it to go lower from its current level.’
The FTSE 100 index’s value fell 14 per cent in 2020, its worst annual performance since 2008
Economists are certainly betting on a massive recovery in GDP. The Centre for Economics and Business Research (CEBR) estimates that the UK economy will grow eight per cent this year.
Meanwhile, the International Monetary Fund (IMF) believes the world economy will grow by 5.2 per cent in 2021, which may help put a thrust under the FTSE, which derives 70 per cent of its earnings from overseas.
Stock market returns and economic growth are not an exact correlation, but the former strongly affects consumer confidence, investment, and hiring; all vital cogs in determining economic output.
Another boost should come now that the UK and the European Union have agreed on a trade deal, although AXA Investment Managers’ Chris St John has said the FTSE 100 would do well regardless of whether or not a deal was made.
‘A lot of its earnings are cyclical in nature, with limited exposure to sectors like technology, and more in cyclical sectors including banking, mining and energy. The outflows have been unrelenting, but that has left the UK looking cheap across most sectors.’
Other market analysts forecast a rebound for those cyclical industries that have had the wind knocked out of them.
David Madden, a market analyst at CMC Markets, thinks 2021 will be good for the mining profession as sales to mineral-hungry China return and iron ore and copper prices remain high.
Beauchamp also anticipates oil firms will thrive despite the growth of renewable energy. The Organisation of Petroleum Exporting Countries (OPEC) is predicting petroleum demand will be 7 million barrels greater this year.
David Madden of CMC Markets thinks 2021 will be good for the mining industry as sales to mineral-hungry China return and prices for minerals like iron ore remain high
FTSE 100 mining and oil companies have had wildly different years; Shell and BP’s shares plunged and each of them recorded huge losses. By contrast, Rio Tinto, Antofagasta and Fresnillo were some of the biggest FTSE risers.
Nonetheless, both industries are not going to die soon. Oil consumption will inevitably revive as people start flying more often, and commercial activity picks up again.
As AJ Bell investment director Russ Mould writes, ‘the chances of the Earth weaning itself off the black stuff in the next five to ten years are pretty limited, so oil and gas fields may not quite prove to be the stranded assets that many think – at least, not yet anyway.’
Will that be enough to keep them in the FTSE? 2020 accelerated structural changes that the business world has been undergoing for many years, particularly in climate change and technology.
Land Securities, the owner of the Bluewater shopping centre (pictured), saw its share price plummet last year as more people worked from home and visited shopping centres less often
Millions more people have realised they can work from home with a laptop, and fewer trips are being made to shopping centres, which has made the real estate groups British Land and Land Securities more vulnerable.
David Madden says firms that fell behind last year such as those two will struggle to catch up while Chris Beauchamp thinks Morrisons and Sainsbury’s could drop out of the index due to their heavy UK-focus.
Beauchamp suggests one company that could enter the FTSE is Games Workshop, the wargame maker whose rip-roaring stock market climb in the last half-decade has been energised by a devoted fan base and popular games like Blood Bowl.
‘The ascent of this niche winner has been a sight to behold, and should it find new global adherents perhaps the FTSE 100 will, in due course, get a little bit more quirky with the addition of this name,’ he remarks.
What happens will still depend a lot on the progress of Covid-19 vaccination programmes across the globe, and whether they can keep up with the potentially dangerous mutations of the disease.
The FTSE’s performance this year will depend a lot on the progress of Covid-19 vaccines, and whether they can keep up with the potentially dangerous mutations of the disease
If the vaccines work as intended, consumer demand will mushroom, and firms in industries that have been horribly affected by the pandemic such as hospitality and travel can bounce back.
Investors will hope this rebound means higher company dividend payments. About £37billion in dividends was either slashed, deferred or cancelled in 2020, with major casualties including Shell, who cut their dividend for the first time in 75 years.
Bank shareholders were also among those badly hit due to the Bank of England ordering them to suspend payouts last March. That ban has now been overturned, albeit on a limited basis.
Richard Hunter, the head of markets at Interactive Investor, said one of the FTSE 100 index’s traditional draws has been its ‘punchy’ average dividend yield, which was usually somewhere between 4 per cent and 4.5 per cent.
But the yield’s reduction, Brexit-related uncertainty, and the index’s dependence on sectors like banking and oil, made the FTSE ‘uninvestable’ to many overseas institutional investors.
Bank shareholders were also among those badly hit due to the Bank of England ordering them to suspend payouts last March. That ban has now been overturned, albeit on a limited basis
He adds that ‘whether the FTSE 100 sees a complete return to the previous levels of payments remains to be seen, but with the record of the largest blue-chip payers largely having remained intact, and with the banks yet to come, the prospects are extremely encouraging.’
AJ Bell anticipates FTSE 100 dividend payments increasing by £10.9billion to £70.8billion, a potential lifeline for many pensioners who rely significantly on them as an income source.
The wealth manager also predicts the index will increase to 7,500 points by the end of the year. That would take it back to around the same levels it was in early 2020 when the coronavirus still felt like a very distant issue.
There is still a tremendous amount of uncertainty ahead, and the FTSE’s performance will rely heavily on how much the world economy reopens.
But after the tough 12 months the FTSE has experienced, many investors are optimistic that bright spots lay ahead.