January 2012
- Miners and banks lead the UK market higher.
- Data on the UK economy remains downbeat.
- A tough month for food retailers.
Investors began 2012 in contrary mood, selling some of last year’s winners (notably the tobacco and pharmaceutical sectors) and buying its underperformers. Miners and banks, which lagged the wider market for much of last year, led FTSE All Share index to its 2.7% gain on the month.
But even as share prices rose, data on the UK economy made for grim reading. Official GDP figures showed that the UK economy shrank by 0.2% in the final three months of last year as the manufacturing sector slumped. Unemployment, meanwhile, hit 8.4% – the highest since January 1996. The number of young people looking for work hit a new record. Given these gloomy readings, what lay behind the market’s enthusiastic embrace of UK stocks?
In large part, the gains were a response to events overseas. First, the renewed willingness of US money market funds to lend to European banks implied that the European Central Bank’s low-cost three-year loans had stabilised the European banking system. Shares in Lloyds Banking Group, Barclays and Royal Bank of Scotland all posted double-digit gains.
The second factor driving markets higher was data from the world’s two largest economies. January brought more indications that the United States’ economic recovery was building momentum. Of equal importance, the Federal Reserve extended its commitment to keep interest rates close to zero until the end of 2014. Meanwhile, downbeat comments from Ben Bernanke were taken as a hint that another round of quantitative easing could be in prospect. There were also hopes that policymakers in Beijing would responds to signs of slowing growth and lower inflation by introducing some form of monetary stimulus. Collectively, this was enough to propel metal prices – and shares across the mining sector – higher. BHP Billiton, Kazakhmys, Rio Tinto and Vedanta all posted healthy gains.
Not everything, however, was quite so rosy. January also brought Christmas trading updates from food retailers. Numbers from Tesco were particularly disappointing. Its 'Big Price Drop' promotion failed to attract customers prompting disappointed investors to wipe more than £4bn off its valuation. Its shares ended the month some 20.8% lower and weighed on the wider sector. In contrast, Ocado’s performance was particularly strong. A good Christmas and ongoing bid rumours helped to restore the confidence lost by a profit warning in December and sent its shares 60% higher – the best performance in the FTSE350 index.
