Too many FTSE 100 stocks are reliant on China for my liking. The reason I don’t like that is because China is slowing and I see more deceleration to come.
Just look at the impact declining Chinese demand has had on mining giants BHP Billiton and Rio Tinto. Or oil majors BP and Royal Dutch Shell. Not to forget HSBC Holdings and Standard Chartered, drinks giant Diageo and fashion chain Burberry Group. All have endured a tough few years and China is largely to blame.
China needs another revolution to reverse the decline: a revolution in corporate governance, market liberalisation, and individual freedom. That will take time. As will the demographic windfall from belatedly scrapping the one-child policy. These days I’m more drawn to stocks that are exposed to the (relatively) booming domestic UK market. Stocks like these three.
Bank On Lloyds
While HSBC generates around 75% of its profits from Asia and Standard Chartered around 90%, Lloyds Banking Group (LSE: LLOY) has nothing like that exposure. It is a domestic rather than a global bank. There are cons as well as pros to that, of course — nobody expects Lloyds to go on a tear, given the mature UK banking sector. And while UK growth is leading the G7, that won’t last forever.
If interest rates start rising next year that will improve margins but at the expense of rising bad debts from overstretched borrowers. The disastrous PPI mis-selling scandal, which has hit Lloyds harder than anybody, still isn’t over. Lloyds still looks like a great dividend stock, forecast to deliver 27% of the entire dividend growth on the FTSE 100 next year, as today’s 1% yield multiplies to 5% or 6%. Next Spring’s retail flotation will finally clear the government out of the picture too. Lloyds has a steady future ahead of it, and there is little China can do about that.
Right Royal Investment
Royal Mail Group (LSE: RMG) has lost direction since launch and its share price is down 17% in the last two years. The stock is slowly finding its level after its over-hyped debut. Trading at 10.55 times earnings, it doesn’t look overvalued today. Its 4.65% dividend yield looks solid and is nicely covered two times.
RMG’s European parcels business generates the most excitement, while intense competition in UK parcels, international and letters is squeezing revenues. Ambitious delivery schemes such as Amazon Prime and the new Argos UK-wide same-day delivery service will up the ante. But the cash is flowing and management has scope to cut costs. Royal Mail should deliver a steady, if less than spectacular, future.
Southern Fries
UK-focused utility SSE (LSE: SSE) is enjoying a fresh surge of energy, its share price up 8% in the last monthAfter bullish management comments about the benefits of its high renewable energy output and “relatively good performance in energy supply”.
This is good news for investors in the FTSE 100 dividend hero whose juicy yield, currently 5.82%, may come under threat if it continues to shed customers. Trading at 12.53 times earnings, at least it isn’t overpriced. Most investors see this as an income stock but the share price is still up 40% over five years, while the FTSE 100 has been flat over the same period. SSE should remain a sparky income play, even if China blows a fuse.
