FTSE 100: Why 2016 Is The Year Of The Active Investor!

In the years since the financial crisis, extraordinary monetary policies within the world’s developed economies have been the predominant driver of equity markets, prompting an almost indiscriminate appetite for shares.

This has inevitably led to some very strong performances from all of London’s major indices, including the FTSE 100, which has averaged a 13.2% annual return for the 2009-2014 period.  

However, the most recent 24 months have not been quite so good. With this in mind, many investors will rightly be wondering what 2016 could have in store for them and for London’s blue chips at large.

An interesting by-product

An interesting by-product of equity market performance in recent years, including for the FTSE 100, has been the decline of ‘active management’.

With Central Bank stimulus pumping up markets, both hedged and naked investment strategies have struggled to keep pace with their benchmarks, giving rise to the accelerated growth of ‘passive investing’ and the proliferation of ‘tracker funds’.

However, the problem now is that markets appear to have changed, once again.

Chinese economic growth is slowing. The Central Bank has been forced to cut rates no less than six times within a 15-month period, and it’s now in the process of devaluing the Yuan under the guise of ‘market liberalisation’.

While uncertainties continue to surround China, the developed world appears to have recovered and the Federal Reserve has raised interest rates for the first time in nearly a decade. The Bank of England is also readying itself for a similar move later this year.

If we add technological change (Shale oil) into the above mix of slowing demand growth in the east and rising rates in the west, what do we get? Chaos in commodity markets.

Herein lies the rub

Even after recent falls, many commodity prices have shown little inclination toward stabilising. With a 10% exposure to oil & gas in its weightings, a similar exposure to mining and a large weighting toward emerging market facing financials, weak commodity prices are a problem for the FTSE 100.

Already they have hampered performance for ‘passive investors’ in the UK, as the index failed to achieve even 1% growth in 2014, while it lost ground in 2015.

This will be doubly disappointing for the ‘passive community’, as there have still been many pockets of strong performance among London’s largest companies.

The insurance sector has yielded returns in the high double digits. So too have the housebuilders and a number of consumer-facing companies, including the likes of Sky and BT Group.

Plan for the worst, hope for the best

I believe firmly in the old adage, ‘plan for the worst & hope for the best’. If we do this then we have to accept that commodity prices may remain low or fall further in 2016. We also have to account for rising rates, in the UK as well as the US.

The implied meaning of this is that we shouldn’t bank on an improved performance from the FTSE 100 this year, because what we could actually get is quite the opposite.

However, this is not to suggest that there won’t still be opportunity for investors. It just means that we will all need to be a lot more selective. More active than passive, because 2016 could still be a good year for stock-pickers.

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James Skinner has no position in any shares mentioned. The Motley Fool UK has recommended Sky. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.