British blue chips are on the rise, but recession could torpedo prospects | FTSE

Britain’s stock market has its critics, who have derided it over the years as a fuddy-duddy collection of “19th-century companies”, and even called it a Jurassic Park index for its lack of cutting-edge members.

But every dinosaur has its day and, rather like the Jurassic Park franchise, the FTSE 100 blue chip share index has enjoyed something of a resurgence in 2022.

While most stock markets have taken a mauling, the FTSE has managed to rise by about 1% – not a mammoth increase, but more than enough to outshine its rivals. America’s S&P 500 is down 14% since the start of January, as rising interest rates punctured tech stock euphoria. Germany’s Dax has shed almost 19%, as fears of energy shortages sent German consumer sentiment to record lows.

The FTSE 100 has in fact been kept afloat by some of the old-economy companies disdained by growth investors. Oil giants BP and Shell have defied the wider market volatility: their shares are up almost 40% as they profited from soaring gas and oil prices caused by the Ukraine war.

Weapons manufacturer BAE Systems is the best FTSE 100 performer this year, up almost 50% as Russia’s invasion heralds increased orders for military kit from governments.

“Banks like HSBC and Standard Chartered have also outperformed, helping to support the FTSE 100, with rising interest rates improving net interest margins,” says Victoria Scholar, head of investment at Interactive Investor. Tobacco companies such as Imperial Brands and British American Tobacco have also fared well, rallying nearly 14% and 25% respectively.

Exporters have been helped by the weak pound, which has shed 12% of its value this year as Britain’s economy outlook deteriorated. The outlook for sterling is also poor, with October’s 80% increase in the energy price cap likely to hit the currency.

Wednesday will see the FTSE 100’s quarterly reshuffle, with asset manager Abrdn looking set for relegation to the smaller FTSE 250 index following a 40% drop in its value this year.

“Huge geopolitical uncertainty, sky-high inflation and worries about economic growth have been challenging for the asset management sector,” says analyst Susannah Streeter of Hargreaves Lansdown.

Other potential relegation candidates are generic drug maker Hikma Pharmaceuticals, whose sales are being hit by fierce competition, and kitchen maker Howden Joinery, as the cost of living crisis deters people from splashing out on home improvements.

Medical company ConvaTec, which makes wound and skin care products, and F&C Investment Trust are the frontrunners for promotion into the FTSE 100. The reshuffle will depend on next Tuesday’s closing prices.

Mike Ashley’s Frasers Group had also been tipped for promotion from FTSE 250 back to the top table. Its shares hit a 10-year high in July after it revealed record profits made when the reopening of stores after lockdown lifted sales.

However, North Sea oil and gas producer Harbour Energy has nosed ahead of Frasers, after it reported a 12-fold increase in first-half pre-tax profits this year.

But the outlook for UK and European markets remains clouded by uncertainty: record energy prices and possible gas rationing could drive European economies into a deep downturn. With inflation heading towards double digits in the eurozone – and already above 10% in the UK – consumers face very steep falls in real income, which will squeeze spending hard.

Mark Dowding, chief investment officer at BlueBay Asset Management, fears the looming recession in Europe could be as severe, in economic terms, as that witnessed after the great financial crisis in 2008. “Of course, should we hear news that Putin wants to withdraw troops and push for peace, this whole outlook could turn on a dime,” he adds.

The wider outlook could also turn on how long the Federal Reserve goes in increasing American interest rates, despite concerns that the US could slide into recession.

Fed chair Jerome Powell struck a hawkish tone last Friday, telling the Jackson Hole economic symposium in Wyoming that borrowing costs must stay at a level that restrains growth “for some time”, to tame the soaring cost of living. “These are the unfortunate costs of reducing inflation,” he said.

This is likely to mean some pain for households and businesses – another sign that winter could be tough.