There is no shortage of FTSE 100 stocks that could make you a packet by the time you come to retire. Indeed, I recently took a look at a couple of shares from Britain’s elite index that could generate the sort of returns that could help you pack up work sooner than planned.
But for every opportunity, there is a pitfall and I believe the blue-chip stocks I have described here could represent a serious threat to your wealth in the near term and beyond.
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Horrors on the high street
The Footsie is jam-packed with retailers that are under the cosh. Kingfisher, for example, has been suffering from declining consumer spending power in the UK in recent times. As if this wasn’t trouble enough, the business is also suffering as a result of a weak DIY market in France.
These ills, allied with the teething problems associated with its painful ‘ONE Kingfisher’ transformation strategy, forced group sales 4% lower on a like-for-like basis during the three months ending April.
Supermarket Morrisons has been faring much better in recent times. In fact, a 3.6% improvement in like-for-like sales during the first fiscal quarter has put it at the top of the tree in terms of the UK’s ‘Big Four’ operators, with sales outstripping those of fellow FTSE 100 members Sainsbury’s and Tesco, as well as Asda.
But by the time you come to retire, I reckon the Bradford chain, like its big-cap rivals, is likely to have become a diminished force. The might of Central European discounters Aldi and Lidl is likely to keep rising as these firms embark on their ambitious store expansion plans, and a full-frontal assault on the online grocery segment cannot be ruled out in future years either.
The newsflow surrounding retailer Next has also been perkier of late, the clothing giant having upgraded its full-year sales and profits guidance thanks in no small part to sunny weather at the start of the year. However, increasing competition among Britain’s mid-tier clothiers, allied with a steadily-increasing cost base, casts a pall over the company’s long-term profits outlook.
These same pressures felt by the high street’s clothes sellers, allied with the aforementioned trouble in the grocery sector, would discourage me from buying food and fashion play Marks & Spencer too.
Drillers in danger
The prospect of oversupply in some major commodity markets also threatens the long-term earnings opportunities of some of the FTSE 100’s miners.
I am particularly concerned over the long-term supply outlook for the iron ore market, a scenario that threatens the earnings picture for BHP Billiton (LSE: BLT) and Rio Tinto (LSE: RIO), for example. These businesses currently source some 38% and 59% of group profits respectively from the steelmaking ingredient.
Both companies, like their peers Vale and Fortescue, remain committed to hiking production now and in the future to keep Chinese mills well supplied. BHP Billiton, for example, produced a record 275m tonnes of iron ore in the 12 months to June 2018, and hopes to pull even more from the ground in fiscal 2019 — a target of between 273m tonnes and 283m tonnes has been laid down.
However, concerns abound as to whether China will in reality be able to swallow the vast amounts of iron ore that the next generation of mega mines and project extensions due to come on stream over the next decade will create.
Fears of slowing demand from the Asian powerhouse’s construction and autobuilding sectors have long been doing the rounds, and concerns over what impact US President Donald Trump’s tariffs will have on overall manufacturing activity in the country have added another layer of uncertainty.
The same worries over sinking import demand from China have also taken a bite out of copper values since the start of the summer, and with a swathe of huge projects like Rio Tinto’s Oyu Tolgoi red metal asset in Mongolia set to start production in the next couple of years, the market faces the same threat of excess supply as iron ore in the years ahead.
This is also big deal for BHP Billiton which sources more than a quarter of earnings from copper. And dedicated, Chile-based copper driller and fellow Footsie member Antofagasta is of course particularly vulnerable.
Banks in bother
The uncertainty created by Brexit on the domestic political and economic landscape has proved enough of a problem for a great many of London’s quoted stocks. Unfortunately, the risks to the country’s economy in the long term have moved up several notches in recent days as the chances of a catastrophic ‘no deal’ UK withdrawal from the European Union have risen.
While this threatens to play havoc with the entire banking sector, at least HSBC can look towards the increasingly-populous, not to mention prosperous, emerging markets of Asia to create brilliant profits growth in the coming years. Barclays is more susceptible to difficult conditions in Britain, although recent reshaping to become a true transatlantic banking giant at least gives the firm significant exposure to the robust US economy.
By contrast Lloyds and Royal Bank of Scotland have no such foreign operations to keep driving profits should revenues slump and bad loans rise in reflection of a slumping UK economy.
What’s more, the threat posed by the steady rise of challenger banks also darkens the income prospects of the country’s eldest banks. Indeed, these new kids on the block are already having a significant impact — RBS for one noted that net loans fell £1.2bn between January and March from the prior quarter partly on “weaker new mortgage lending due to intense mortgage competition in the past six months.”