However, by the end of the year, London’s blue chip benchmark had again lagged worryingly behind its counterparts, recording a decline of 0.8 per cent.
In the US, after three years of double digit gains, the S&P 500 index proved resilient despite the strong dollar and the prospect of higher interest rates, achieving a total return of 1.4 per cent for 2015. However, both the FTSE 100 and S&P 500 pale in comparison to the German DAX, which rose by 10 per cent over the year, helped by an accommodative central bank and a weakening Euro.
When one compares the performance of the FTSE 100 with the S&P 500 and the DAX over the last 10 years, it can be seen that the US index has gained 136 per cent and the DAX has risen by a similarly impressive 113 per cent. The FTSE 100, however, is up just 60 per cent. This performance takes into account dividend payments as these are an important component of UK equity returns, and the comparison would look even worse without.
UK Equities: FTSE 100 TR GBP; US Equities: S&P 500 TR GBP; German Equities: Dax 30 TR GBP
Past performance is not indicative of future results
Why has the FTSE underperformed?
Willem Sels, Chief Market Strategist for HSBC Private Bank, explains why we should not be surprised that the FTSE 100 has underperformed the other two indices:
"The obvious thing to look at with the FTSE 100 is that it is highly geared to mining and oil companies compared to the S&P and DAX. The FTSE has almost double the exposure than the S&P 500, around 17.5 per cent vs. 9.3 per cent respectively, whilst the DAX has very little, if any, exposure to these sectors."
Performance of Commodities
||12 months to 19 Feb 2016
||Price @ 19 Feb 2016
|Brent Crude Oil (per barrel)
|Copper (spot price)
||Weighting within FTSE
Over the 12 months to 19 February 2016, the Brent Crude Oil price per barrel and spot price of Copper have both fallen and each has a significant impact on the resource-heavy UK share index. Energy and Basic Materials showed similarly poor performance and 2015 was in fact the third consecutive year of commodity price falls.
Index commodity exposure
Source: Bloomberg, MSCI UK & MSCI World, December 2015
Past performance is not indicative of future results
HSBC, British American Tobacco, GlaxoSmithKline, BP, Royal Dutch Shell, Vodafone, and AstraZeneca together account for almost 30 per cent of the FTSE 100 index.
The DAX’s top four companies make up 36 per cent of the index, but their main constituents are less reliant on commodities, leaving them relatively unaffected by the recent fall in prices.
Could 2016 finally see a turnaround in the UK?
Looking back on 2015:
- Global corporate earnings growth fell behind expectations from +8 per cent at the start of the year to -25 per cent at the end
- Growth forecasts cut across all sectors
- Largest declines in Energy and Materials sectors (earnings halved)
- Corporate earnings hampered by currency strength and further declines in commodity prices
- Fourth consecutive year of negative earnings growth
Looking forward to 2016:
- Some recovery expected (dependent upon commodity price improvement)
- First positive earnings growth since 2010-11. Forecast of +4 per cent in the UK by HSBC Global Research
What could affect recovery?
- A continued decline in commodity prices
- Bank of England interest rate rises
What does 2016 look like for other regions?
- Most analysts are more optimistic in their forecasts. For Europe, where improving fundamentals are seen to outweigh risks, HSBC Global Research expects +15 per cent earnings growth for 2016, similar to what was recorded in 2015 and much helped by an accommodative central bank, low bond yields and a weaker currency.
- The US is expected to see a rebound of earnings to +7 per cent for 2016, as energy earnings stabilise and dollar strength starts to abate.
- The commodity slump continues to impact both equities and currencies. We believe that a stabilisation in Chinese growth will ultimately support prices, but overcapacity adds to the woes of commodity producers and leads us to remain careful on the materials sector.
How has this affected our view on Equities?
Despite a volatile start to the year, we maintain our equity exposure in portfolios, with a focus on quality, diversification, and selectivity. We are slightly overweight in developed market equities and underweight in emerging markets (except Asia). We wait for more clarity on the US interest rate path and Chinese economic growth before we add further to our risk exposure, and believe that US rate rises should be slow. As a result, we think fair equity market valuations, ample global liquidity and a relatively broad-based domestic recovery in the US and Europe, should provide enough support factors to warrant our positioning with a 6-month view.
How do we tackle this complexity in your portfolio?
- Asset class diversification
- Geographic diversification
- No ‘home bias’ – we don’t allocate more to your home market than is warranted
by its share of global asset markets
“A large allocation to overseas assets introduces currency risk. However, given more than 75 per cent of FTSE 100 earnings are earned overseas, UK equity investing is already prone to currency risk. Investing heavily in one market can have unintended consequences, such as introducing sector concentration risk.
There will of course be times when the UK market outperforms and there will be periods where it does not. The performance of the past few years re-enforces our view that a diversified global model without home bias is the superior approach to investing”.
Ed Klinke, Head of Discretionary Portfolio Management for HSBC Private Bank
It is our belief that the core to your long-term financial goals should be a mix of asset classes to maximise return, whilst minimising risk. We think this can be achieved by considering a Discretionary service that enables you to outsource the complexities of portfolio management to a team of investment professionals, equipped to deliver HSBC’s collective best thinking into your own portfolio.
Past performance is not a reliable indicator of future performance. Where an investment is denominated in a currency other than your local currency, changes in exchange rate will affect the performance of your investment.