Even though I expect the FTSE 100 to perform well at an index level next year, this doesn’t mean I think all constituents will. In fact, there are members with some red flags that have recently made me concerned. Here are two examples I’m being careful about.
The oil outlook
The first one is BP (LSE:BP). Over the past year, the share price is down 15%.
Some of this drop has been caused by weakness in the oil price. At the start of this month, I flagged up the US Energy Information Administration’s (EIA) November energy outlook report. The forecasts didn’t indicate any significant rally in the oil price if we fast forward to this time next year.
Given that BP is one of the major global oil and gas producers, revenue is impacted by the market price of oil. So if the forecast is correct and oil prices don’t increase much next year, revenue might be impacted.
Further, Q3 results showed the weakest underlying replacement cost profit for the firm since Q4 2020. This measure of profit is one that the business uses as a key metric to measure performance. Part of this was due to weaker refining margins, as well as a slowdown in global oil demand. This doesn’t bode well for 2025.
BP shares could surprise me next year. If other areas of the business such as natural gas, biofuels and renewable energy perform well, this could help to offset other divisions.
Potential headaches
Another company I’m cautious about is Barclays (LSE:BARC). This might surprise some given that I owned Barclays shares until relatively recently. However, over the past month or so there have been some developments that I’m a little bit worried about.
For a start, the ongoing FCA investigation into potential mis-selling of car finance is attracting more and more attention. This doesn’t just impact Barclays, but the size of total potential sector fines could run into the tens of billions of pounds according to analysts. It’s not the only reputational impact for the bank, with news last month of Barclays being fined £40m for reckless deals during the last financial crisis.
Further, the Q3 results showed that net interest income is starting to stall as interest rates begin to drop. In the first nine months of this year, net interest income fell by 1% versus the same period in 2023. Looking ahead, I expect at least three interest rate cuts from the UK in 2025. This should act to further reduce the income the bank makes.
The fact that the stock is up 84% over the past year shows that these concerns haven’t put investors off so far. Despite the rally, the price-to-earnings ratio is only 9.54. Therefore, some might still see this as a cheap stock to consider…. but not me.
