London — Stock market investors have been warned not to look for stellar performance in a single sector in 2017.

While miners dominated the list of best-performing UK blue-chip stocks in 2016, fund managers said opportunities for value investors were now less stark.

"Last year was obviously a year of recovery. You wanted to go in owning the stuff everyone hated and not the stuff everyone loved," said Thomas Becket, chief investment officer of Psigma Investment Management.

The FTSE 100’s five best-performing stocks by price return in 2016 were all miners, led by Anglo American and Glencore. Anglo American increased its share price just over 287% for the year and Glencore 206%.

Silver and gold miners Fresnillo and Randgold, Rio Tinto and BHP Billiton also hit the top five, returning 55%-72% for the year, after a poor start to the year.

"The most important reason they’ve done well is because of where they were starting from — they were looking cheap," said Matthew Jennings, investment director for UK equities at Fidelity, the asset manager. "Because of the unloved nature of them to start with, the reversion can be stark."

However, at the beginning of 2017 stocks in the FTSE 100 are less dispersed in value terms.

"Nothing looks wildly cheap and nothing looks too expensive," said Becket. "We enter 2017 with the market being as fairly distributed value-wise as it’s ever been. Don’t take really aggressive bets against the index at this point in time. Trying to second-guess what the year might do is wrong."

Jennings agreed: "If we’d had this conversation one year ago, there was one group of extremely expensive stocks and one group of cheap.

"Today the gap between cheap and expensive has closed to some extent, and that’s happened over the past three months in a sharp way. You have to look hard at where the market is on stocks specifically."

However, some investors predicted that while individual stock selection would come back into vogue this year, the sector trends would continue for some months.

Richard Buxton, CE of Old Mutual Global Investors, said miners and banks — which benefit from rising interest rates — could continue to rally as bond yields back up and the "Trump inflation trade" continues.

"There will be individual winners and losers, but certainly for the next couple of months I would stick with financials and miners because they will benefit from this ‘end of deflation’ scare," he said.

"It may be that this carries on for the first quarter as euphoria about Trump continues, but as the year progresses it might be a more of a case of show me the money," he said.

Investors’ views were mixed on whether the rally for mining stocks could continue. Jennings said while demand for commodities had increased, supply was likely to remain stable. "If you don’t have the withdrawal of supply it’s difficult for the commodity price to make progress, unless there’s a surge in demand," he said.

Becket of Psigma said the miners’ rally might continue, arguing that some of the performance had been down to hedge funds removing their short positions.

Poor performers based on last year’s share price movements include a mix of sectors, ranging from domestically focused housebuilders Taylor Wimpey and Barratt Developments, retailers Next and Dixons Carphone, and airlines EasyJet and International Consolidated Airlines Group, which owns British Airways.

John Baker, a fund manager at JPMorgan Asset Management, said he had rejected the idea of buying sectors and was instead focusing on "what companies are actually saying".

The decline of housebuilders’ stock prices was "quite clearly a fear of a recession and tightening of credit conditions", Baker said, but companies had "reiterated their commitment to returning cash to shareholders".

Buxton said that, while he had full confidence in the UK housing market, a rise in interest rates usually corresponded to a sell-off in housebuilders’ stocks.

"My colleagues are still comfortable holding housebuilders, but I confess I did tiptoe away from my holding in Taylor Wimpey," he said. "I’m selling [housebuilders] early, but I bought them early — in 2010."

Retailers suffered both low consumer confidence and sterling weakness. "For most retailers in the UK, the cost of goods is in dollars, they source goods elsewhere," said Baker. "And that’s a hit to the profit margin, because the cost of goods rises but the revenues are not rising."

The only retail business in the top 10 share price risers was supermarket chain Wm Morrison, which largely benefited from low expectations and a low starting share price at the beginning of 2016.

Analysts downgraded earnings forecasts for the likes of Morrisons following the growing popularity of discount retailers Aldi and Lidl.

ITV, the only media share in the list of poor stocks, had a slowdown in advertising revenue in the first half.

The prospect of rising interest rates should also affect investors’ stock selection though the fate of banks, which should benefit from rising interest rates, was still "unclear", Becket said.

Jennings said banks were "very much on the radar".

"They’ve stood out as being cheap and unloved but operating in a fairly sensible way, more so than before the financial crisis," he said. "There’s been a huge change. Balance sheets are much stronger."

Jennings said he was analysing companies’ pension deficits in light of a potential shift in the interest rate environment. Companies’ pension deficits have been worsened by falling bond yields, but would benefit from a rise in interest rates.

"We’ve identified a few companies where the market has been too hard on them," he said. "Some of these stocks with big pension deficits have been screaming unloved and cheap.

"The end of lower for longer [interest rates] is very, very significant," he said. "People should be diversified going into this environment — people will have significant exposure to the companies that worked well in ‘lower for longer’, but it doesn’t mean they will work for the next three to five years."

© The Financial Times 2017

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