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AJ Bell: Why the FTSE 100 is warming to an economic upturn

Please see below for one of AJ Bell’s latest investment articles, received by us yesterday 18/04/2021:

As the UK starts to emerge from its latest (and hopefully final) lockdown, the FTSE 100 already trades above the levels reached just before the pandemic first made its presence felt in China and Southern Europe in early 2020.

There can be no finer example of how financial markets are forward-looking, discounting mechanisms which seek to price in future events before they happen. Yet they are not right all the time. No-one, but no-one, owns a crystal ball (or at least one that works) and if markets really were that prescient, then there would never be major sell-offs or upward surges, as no-one would ever be surprised by anything.

What the advisers and clients must therefore do, in order, is assess the facts as they are known, determine the current consensus about what will happen and – by looking at valuation – decide whether the risks are to the upside or downside. Therefore, they must look at the broad range of possibilities concerning what may happen, what could be the biggest surprises and their potential impact so they can decide whether the potential upside rewards outweigh the downside risks over their preferred time horizon.

In sum, the best fund managers are not necromancers or chancers trying to guess the future. They are experts at judging probabilities and act according to the cold maths of valuation, be that measured by earnings, cash flow or yield. It may not take much good news to boost a market that has fallen sharply to price in negative events (it may even just take the absence of fresh bad news), while it may not take much bad news to jolt a market if it has made big gains.

The FTSE 100 bottomed in late March 2020 at 4,994, long before the worst news about the pandemic and its toll on lives and the economy became known. After a near-40% gain in the UK’s headline index over the past year, advisers and clients must once more assess the balance of probabilities so they can decide whether the index has further to run or not and a good place to start is earnings forecasts.

New highs

At face value, it does seem odd that the FTSE 100 is trading above its pre-pandemic levels, even if the number of daily new COVID-19 cases is back to where it was last March and last September, and the vaccination programme continues apace. The economic outlook is still uncertain: the effects upon the behaviour of corporations and consumers alike are yet to reveal themselves and other parts of the globe are less advanced in their race to inoculate their populations.

But it does make sense if you think that the consensus earnings forecasts for the FTSE 100 are going to be accurate. An aggregate of the estimates made for each member of the index suggests that the FTSE 100’s total pre-tax profit will be £178 billion in 2021 and £205 billion in 2022.

FTSE 100 is forecast to make record pre-tax profit in 2022

Those figures exceed the £166 billion made in 2019, before the pandemic hit home. Moreover, if the 2022 forecast is attained, then that would represent a new all-time high for annual earnings, surpassing the £199 billion made in 2011.

In this context, it is not too hard to see why the FTSE 100 is trading where it is, or even make a case for further gains, since the index trades below its May 2018 zenith of 7,779 even though record profits are expected for 2022.

Advisers and clients must therefore decide whether the forecasts are reliable, too optimistic or too pessimistic and what must happen for analysts to be off-beam (which they usually are, owing to the absence of that crystal ball).

Heavy metal

To do this, advisers and clients need to parse the FTSE 100’s earnings mix. Roughly 60% of forecast profits come from just three sectors: mining (now the single biggest earner), financials, and oil and gas.

Just three sectors are expected to generate around 60% of FTSE 100 earnings in 2021 and 2022

In some ways, this makes it easy for advisers and clients to judge the upside and downside potential: in crude terms, the stronger the economic recovery the better, so far as the FTSE 100 is concerned as the index’s key industries offer huge gearing into GDP growth. The opposite also applies. A weak recovery (or heaven forbid an unexpected double-dip) would be potentially a nasty surprise.

A breakdown of forecast earnings growth makes this picture clearer still. Analysts think that the FTSE 100’s aggregate pre-tax profit will rise by £75.1 billion this year and by a further £27.1 billion in 2022. Miners and oils are expected to generate two thirds of that between them in 2021. Oils, consumer discretionary and financials are forecast to provide four fifths of the expected profit uplift in 2022.

Just three sectors are expected to generate more than 75% of forecast earnings growth in 2021 and 2022

Rising commodity prices and steepening yield curves would therefore be a good sign; falling and flattening ones would not. Those advisers and clients who buy into the narrative that inflation is coming, after being largely dormant for 40 years, will therefore feel right at home in the UK. Those who still fear debt-ridden deflation may be tempted to steer clear and seek their fortunes elsewhere.

Please continue to utilise these blogs and expert insights to keep your own holistic view of the market up to date.

Keep safe and well.

Paul Green DipFA


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AJ Bell Precious Metals Blog

An article received from Russ Mould of A J Bell over the weekend weighing up precious metals.

The silver price is cheap relative to gold

But silver miners aren’t quite the bargain relative to the metal

 Russ Mould

The Silver Surfer was the creation of Marvel Comics legend Jack Kirby and the character acted as the herald of Galactus, the devourer of planets. This intergalactic super-being was usually fended off by the Fantastic Four or The Avengers.

From the point of view of investors, inflation devours wealth as scarily as Galactus consumed solar systems. Rather than turn to superheroes for protection against this potential threat, markets are turning toward something else known for being nearly indestructible, precious metals – principally gold and silver.

At the time of writing gold is setting new record highs above $1,900 an ounce but at $24 an ounce silver is still trading way below its prior peaks of 2011 and 1979, even if silver’s 34% year-to-date gain in 2020 outpaces that of gold by several percentage points.


Precious metals tend to arouse strong feelings among investors. Some investors love them as a potential hedge against inflation, some against deflation and some against unforeseeable disasters and market dislocations, while others detest them, viewing gold in particular as a barbarous relic or inert useless lump.

But bulls are putting bears to flight right now and there may be three possible reasons why gold and silver are both doing well.

First, the market may be pricing in the almost unthinkable return of inflation, thanks to rampant central bank money creation through quantitative easing (QE) schemes, governments’ accumulation of ever-higher deficits, supply-side dislocation thanks to Covid-19 and possibly firms putting up their prices to help the meet the additional costs of staying in business in a post-pandemic world.

A five-year forward expectation for inflation of 1.67% in the US is hardly earth-shattering stuff, compared to the double-digit rates of the 1970s and early 1980s, but it does seem as if investors are becoming more wary of inflation.

Second, so-called ‘Austrian school’ economists do not define inflation by price changes, but change in money supply, relative to the volume of services and goods produced. The 24% year-on-year surge in US M2 money stock will have anyone who follows their theories on a state of high alert.

Third, related to the money supply, central bank money creation and higher government deficits could be driving fears of monetary debasement, prompting a rush to perceived havens and stores of value such as gold and to a lesser degree silver.

The US Federal Reserve has ramped up QE in 2020 in response to the pandemic, taking its total assets from $4 trillion to $7 trillion, through a series of programmes designed to buy a wide range of financial instruments.

Gold and silver surged between 2008 and 2011 as the Fed ran its first three rounds of QE but they then lost ground as it looked like the monetary authorities had regained control of the economic situation.

The pandemic may have changed all that, and the cost of keeping the show on the road this time around has already been much higher. One question that buyers of gold may already be asking themselves is what action will be taken by the Fed and other central banks next time a recession hits, as the system will feature even more debt and potentially be even more susceptible to an unexpected shock.


There is a fourth angle which pertains to silver only. Unlike gold, silver has industrial uses and as such is a more ‘cyclical’ play, because it is the best conductor of all metals and has antimicrobial attributes which make it a perfect biocide.

Demand from the traditional film photography industry is probably all but gone but these chemical properties means silver is ideal for the medical equipment, electronics, water purification and solar power industries.

As the world focuses more on renewable energy, solar panels could be a driver of silver demand. Whether this proves more potent than demand for a haven remains to be seen, but historical data does suggest silver is trading cheaply relative to gold.

The gold/silver price ratio has average 56 since 1970 but an ounce of gold currently trades at 80 times the price of an ounce of silver.

While the HUI Golds Bugs index trades below its average ratio to the metal price, silver miners do not look especially cheap compared to the physical commodity, based on the relationship between the metal and the Solactive Silver Miners index.

That benchmark has a fairly limited history and silver miners traded a lot more expensively relative to the metal in 2008 and 2011, so investors who prefer miners to metal still have much to ponder.

There is no guarantee that silver’s run will continue – if Covid-19 is beaten and the economy bounces back more strongly than hoped then the appeal of haven assets might not be anywhere near as strong.

As an investment on its own precious metals are a little different.  Safe haven assets but with the physical cost of storage and no income yield.  Fund Managers may occasionally use precious metals as part of a portfolio in heightened volatility, but they don’t tend to hold for example gold for the long term.

Trying to buy and sell precious metals and get your timing right is difficult.  George Soros, a famous Hedge Fund Manager, managed to call it right a few times but he also shorted sterling and was known as ‘The man who broke the Bank of England’ in the 1992 Black Wednesday UK currency crisis.

Steve Speed