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UK equity indices rise above the tension

May 2018

Despite escalating trade tensions, uncertainties over Brexit, and political instability in Italy, UK equity markets rose during May. The FTSE 100 Index increased by 2.2% and reached a new all-time high of 7.877 points during the month. Nevertheless, the blue-chip index was outperformed by mid-caps over the month, and the FTSE 250 Index climbed by 2.8%. 

  • The UK retailing sector remained under pressure
  • Demand for UK equity income funds picked up
  • The FTSE 100 Index reached a new closing high during May

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Despite escalating trade tensions, uncertainties over Brexit, and political instability in Italy, UK equity markets rose during May. The FTSE 100 Index increased by 2.2% and reached a new all-time high of 7.877 points during the month. Nevertheless, the blue-chip index was outperformed by mid-caps over the month, and the FTSE 250 Index climbed by 2.8%. 

“Investors’ appetite for funds in the UK Equity Income sector rose sharply”

The yield on the FTSE 100 Index eased from 3.9% to 3.85% during May, while the FTSE 250 Index’s yield edged down from 2.7% to 2.67%. In comparison, the yield on the benchmark UK government bond dropped from 1.48%. The best-performing FTSE sectors over the year to date were automobiles & parts, technology hardware & equipment, and food & drug retailers. In contrast, the worst-performing sectors included fixed-line telecommunications, tobacco and software & computer services.

UK quoted companies issued 73 profit warnings during the first quarter of 2018, according to a survey undertaken by EY, and the retail sector was particularly badly hit. The number of profit warnings issued by companies in the FTSE Consumer Services sector hit a seven-year high, led by 13 warnings from the General Retailers sector. EY found that almost one-fifth of FTSE General Retailers issued a profit warning during the first quarter, undermined by cyclical and structural pressures. Meanwhile, warnings from FTSE SmallCap companies reached their highest level since the financial crisis; again, these were concentrated amongst consumer-facing companies. 

In the retailing sector during May, Mothercare unveiled restructuring plans, M&S reported a sharp decline in annual profits and an extensive store-closure scheme, Greggs warned on profits, and Dixons Carphone issued a profit warning but maintained its full-year dividend. Elsewhere, betting company Paddy Power Betfair reported a disappointing first quarter and announced plans to return £500 million of cash to shareholders in the next 12 to 18 months via a series of share buybacks.

Equities were the best-selling asset class during April, according to the Investment Association (IA). Investors’ appetite for funds in the UK Equity Income sector rose sharply and the sector went from a net retail outflow of £16 million in March to inflows of £72 million in April. Demand for funds in the Global Equity Income and UK Smaller Companies sectors also turned positive. At the other end of the spectrum, the mainstream UK All Companies sector remained firmly out of favour.


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