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Footsie Magic

24 February 2023

The newspapers are full of reports that the UK will suffer lower growth than almost all other developed economies, that our inflation will remain more intransigent and our interest rates stay higher for longer. Sunak/Hunt’s tax regime is killing business and driving new investment abroad. And yet the FTSE 100 Index recently touched a new high whilst all other major indices linger well below their peaks. How come?

The answer lies in not only the constituents of the Index but also how those constituents come to be there. The FTSE 100 is a constantly changing beast. Every three months the three smallest members by market value (by definition they are performing poorly and their momentum is comparatively weak) are ejected from the Index. They are replaced by the three highest value members of the FTSE 250 Index which, by definition, are performing strongly and have positive momentum. So basically 12% of the constituents change each year with a bias, assuming the negative and positive momentums are not ephemeral, towards the positive.

Most of the FTSE 100 constituents can be classed as multi-national businesses. They may be listed in London but they operate worldwide so they do not offer the best reflection of the domestic economy. Also, there is a constant heavy weighting towards banks, oil and energy companies and miners, all of which have their own reasons for their recent strong performances. Banks are benefitting from higher interest rates and better margins, oil/energy companies from considerably higher prices than a year ago and miners from the huge price increases in the new age minerals sought for the world’s perceived green future. These companies form a very large mass at the centre of the Index, all with positive momentum over recent months and of a collective weight to drive the FTSE 100 towards its former peak.

This set of circumstances won’t last forever, of course, but for now the warm winds seem to be behind this group of companies, suggesting the firm performance of the FTSE 100 should continue. This takes us back to our recently expressed view that the FTSE 250 Index and the larger All Share Index constituents are likely to be the main hunting ground for the marauding overseas predators and venture capitalists. (This week it was the turn of Wood Group). This is also where the most modest ratings will likely be found – some deserved and some not. We will be seeking the latter.

Two companies we have been monitoring within the FTSE 250 index are Vesuvius (VSVS) and RHI Magnesita (RHIM). Both companies service the steel industry and industrial companies, all of which have struggled with elevated energy costs. With these costs now abating we should start to see a continued improvement in the share prices of both companies.

Vesuvius & RHI Magnesita have exposure to US, Asia Pacific & EMEA regions along with longstanding client bases. Both companies trade on single figure price to earnings and offer a yield of c. 5%.

They are due to update the market next week so we will be following them closely. Although FTSE 250 constituents they are classified as moderately high risk.

NAPs So Far

Early days yet, but all our selections have enjoyed positive momentum so far. URA Holdings are up from 1.4p to 2.5p, Hargreaves Services from 427p to 445p, DiscoverIE 759p to 835p and Jet2 1045p to 1299p. We will continue to monitor them now and again as the year progresses.

Time’s Up

It was 53 years ago this month, if my memory is correct, that I started life in the stock market, in the back office of L Messel & Co, then a pretty sizeable firm and too large for me to learn all aspects of the business, I felt. So I moved to a tiny firm, Belisha & Co, where I started work on Decimal Day, 15th February 1971. This small partnership was a brilliant training ground and it was there that I was allowed to develop my business and move on when the partners, none of them spring chickens, decided to call it day in the late 1970’s.

And now it is time for me, too, to call it a day. I will be retiring at the end of March and I leave a great team in Stuart, Neil, Jeremy and Joanna and a strong, innovative firm in Dowgate Capital Ltd, all of whom will strive to continue providing the service you have come to expect.

Over the years I have come to regard many of you as friends as well as clients and I hope retirement does not prove a barrier to staying in touch. I face my last month with a tinge of sadness and an ambition to finally get my golf handicap down to something less embarrassing. One thing I can be sure of though – I will miss life in the market!

My best wishes to all of you.

Russell Dobbs FCSI

Chartered Wealth Manager (for now)