As the fog clears, can we be expecting a positive 2016?

We’ve talked a lot about the need for a diverse range of investments and a trading strategy that includes short selling (something traditional share dealing doesn’t allow you to do). Both approaches will have helped savvy investors beat the market in 2015, and indeed in what’s been a tough start to 2016.

But plenty of traders will have made money by going Long only – don’t forget that the UK Index ’s declines could be almost all attributed to just 25% of its components since the beginning of 2015 with that small group dominated by the usual suspects: Banks, Oil & Gas and Mining companies. It’s perfectly conceivable that a well-chosen long only portfolio could have solidly outperformed the UK 100 .

What does this mean for you, the trader? It means, quite simply, that if an idea like shorting really is too alien for you to apply to your trading strategy (and there’s no shame in that), you can still make money by simply diversifying.

In 2015, house builders were the standout performers, rising 30 to 40% thanks to government stimulus programmes and the prospect of low UK interest rates for longer. Insurers also benefitted by 20 to 30% with generous dividend policies and solid business growth in addition to expectations of a UK rate rise in 2016 (which would increase income from short dated government bonds in which the non-life insurers invest).

Travel stocks and the airlines climbed 25-30% on low oil prices. That’s right, low commodity prices aren’t bad for everyone! Media companies rose by up to 30% and Pharmaceuticals climbed by up to 16% as M&A chat pervaded the press.

We’ve been asking the question: “What’s changed?” as an argument against going long mining and oil stocks, but the question is equally valid for the rest of the market. What if we were to look at some sectors that did well (and not so well, though we’ll ignore miners and oil stocks this time!) in 2015 and pose the same, simple question? If nothing’s changed then it’s fair to assume current trends will continue, while if it has then we should expect a resultant change in our focus area.

Nearly all media focus has been on a Chinese slowdown, falling commodity prices and the knock-on for the Oil and Mining sector because these are what weigh most heavily in the UK Index , or used to be at least. But that doesn’t mean they ARE the UK Index .

There are actually lots of positive things going on within the UK 100 right now, and plenty for the long only investor.

Recovery potential in UK Retail

The UK retail space was blighted in 2015 by a well-documented supermarket price war that saw the big three (SBRY, TSCO, MRW) take on each other and a common foe in the almost sickeningly worshipped discounters. Interestingly, the grocers aren’t being hit by a lack of consumer spending or disposable income since these are both growing and forecast to continue doing so (Source: Tradingeconomics.com).

So what’s changed?

Not much – and that’s important because J Sainsbury (SBRY) has consistently outperformed its UK 100 peers in the marketplace. We’re constantly seeing investors pile into Tesco shares at every opportunity, seeing them as ‘cheap.’ Why? Because they shop at Tesco, and it’s always busy? Many have found out the hard way that this all has little to do with footfall in stores, because food prices are 2% cheaper today than they were a year ago.

This is about astute management and the recovery of market share from (fanfare please) *Aldi and Lidl*. Tesco finished the year down over 20%. Morrison’s was demoted to the . SBRY is the only UK 100 supermarket to finish 2015 in the green (up 5% to be precise), while the UK 100 index itself fell by 5%. With conditions similar to how they were last year, is it reasonable to expect SBRY to thrash the index again in 2016?

J  Sainsbury (SBRY)                                                         Grocers

Will shares recover to break 280p or pull back once more towards 225p?

Inclement weather and absent rate hikes to press on insurance?

Insurance routinely invests in government bonds and benefits from the income they yield. Low rates equal low income. High rates…. well, you can fill in the second bit for yourself! If you’re expecting rates to go up, you might therefore go long an insurance company, and boy did people go long insurance companies last year. 8 out of 9 UK 100 insurance firms beat the index with 3 posting gains north of 20%. And the weather? Well, it’s fair to say that the floods have brought short term volatility to the table.

What’s changed?

Falling stock markets, although not really a good indication of a country’s economic health, are often seen as such by a fickle and ill-informed investment community. Let’s look at Direct Line Group, since we highlighted it in our Q4 2015 report. It’s becoming less likely we’ll see a UK interest rate rise imminently, which may pressure the share price. Additionally, the weather has got and will continue to get weirder, but higher premiums should mitigate potential damage in that arena, and more policies will be taken out too. Things are looking a little less bullish overall, but don’t forget that stock markets generally don’t reflect the underlying economic situation, which might be improving… so, UK rate hike anybody?

Direct Line (DLG)                                         Nonlife Insurance

Having dropped down below 15-month rising support, is now the time to buy shares on the dip, or go short?

House builders to continue to rise as rates stay put & demand stays high?

House builders looked toppy towards the end of 2015, with sector volatility and a pause in their previously relentless uptrends. Here is a case whereby all this Chinese market chaos was beneficial, because borrowing remained relatively cheap throughout 2015 as a result. If people believe the price of property will rise, as almost everyone does (it’s a no brainer, yeah?) then it follows that property related companies – right the way through to plant hire and kitchen fitters – will do so too. And they did, for the most part.

What’s changed?

With the UK’s UK 100 being so heavily weighted by banks and USD/commodity-sensitive stocks, a falling benchmark index (the actually went up 8% in 2015, but no one’s bothered about that it seems) has certainly put the brakes on the Bank of England’s plans to raise rates soon. Housing demand appears to be high and house prices are still rising. The house builders were topping out in Q4 2015 because everyone thought borrowing costs would rise, leading to a fall in demand.

Taylor Wimpey (TW)                                          Housebuilders

Taylor Wimpey shares have tested resistance 5 times in 6 months. They’ve tested rising support 5 times in 13 months. Which is more likely to be broken?

Travel stocks to continue to benefit from low oil? 

Most of us are consumers of energy, which means falling oil prices are a dream. The only thing they’re not a dream for are oil companies. So ignore oil companies. What type of company is a heavy user of fuel?

While much of the investment world was feeling the commodity price downturn as a nasty little alien growing in its stomach, those who invested in travel companies saw 7 of the eight UK 100 travel stocks outperform the index with Carnival (CCL) and International Consolidated Airlines (IAG) going up a staggering 32% and 25% respectively. I’m sorry; did someone really say equity markets suffered in 2015?

What’s new?

Well, oil’s still falling because nothing’s changed to reverse that state of affairs. Was 2015 an overly bullish year for the markets? Could we see a correction back to more realistic levels? The second half of 2015 was 6 months of almost pure fear and uncertainty. That 4/5 of the UK 100 ’s components outperformed the index is amazing, quite frankly.

Carnival (CCL)                                                   Travel & Leisure

Carnival shares are cruising into 2016. Will they continue to make new highs, or are they overloaded?

The point is this:

This report isn’t telling you to buy or sell (or go short) anything. What we want to illustrate is the fact that most UK listed companies had a good year in 2015 – the year in which a potential Grexit, uncertainty about the US Fed’s plans for monetary policy, a Chinese slowdown, emerging markets currency wars, middle east unrest, tanking oil prices, a general commodities supply glut and myriad other negative drivers gave us all the heebie jeebies.

The situation we are in now is not much different: Greece is still on the edge (it’s just taken a back seat because it won’t sell papers right now), Europe still has its growth concerns, China is still engaging in an entertaining but futile round of trial and error with its stock markets and the US Dollar remains a headwind for commodities and emerging markets, not to mention the rise of a particularly unpleasant band of extremists in the middle east. What do you think this means?

It means nothing’s really changed. Banks, miners, oil stocks and a handful of others (together, only about 1/5 of the UK 100 ) had a terrible 2015 on the whole in terms of market returns and bad press. What’s presenting us with buy opportunities here as we move into 2016? Nothing!

On the other hand, 4/5 of the UK 100 managed to weather the storms pretty well in 2015. What’s to say they won’t continue to do so in 2016? Remember, some of these stocks didn’t merely ‘survive.’ They positively flourished.

Know this: If nothing’s changed in terms of the underlying economic climate, then you’re in with a good chance of picking a winner or two by chance alone. There’s still money to be had by trading long only in 2016. Add to the mix our no-nonsense research and the support of a dedicated team member and the chances are even better. If you want to trade short sometimes too, well, the scope is wider still.

At Accendo we’re here to help you trade. Allow us the opportunity to do our job.

You won’t be disappointed.