Ever since the start of the war between Russia and Ukraine, the implementation of sanctions against the aggressor Russia has resulted in unprecedented levels of inflation across the prices of multiple global products such as oil and food. Battling the rising cost of energy, Brent crude oil has fallen below US$100 ($136.72) temporarily as UAE and USA release more of their reserves and increase their production to curb the rising oil prices.
However, oil prices rose shortly after the EU announced sanctions on Russian oil. Similarly, global food prices soared with corn and soybeans peaking at a record high due to the ongoing war.
We are also negatively impacted by this in our daily lives here in Singapore, with the apparent cost of petroleum increasing. Food shortages have also led to our neighbouring country Malaysia halting the export of fresh chicken into Singapore from June 1.
The UK inflation rate reached a 30-year high at 7% this year. Soaring food and energy prices have resulted in a spike in the cost of living. The Bank of England (BoE) is looking to put a 4th interest rate hike to fight inflation, increasing the rate to a 13-year high since the 2008 financial crisis. HM Treasury report forecasted the UK GDP growth to slow down to about 2.0% & 1.7% in early 2023.
Despite the slowing down of the UK economy, the FTSE 100 index has maintained steadily with little fluctuation, but what is the FTSE 100 exactly?
What is FTSE 100?
See also: US equities, IG, fixed income strategies, gold and copper among top investment picks: UBS
Similar to the S&P 500 in the US, the Financial Times Stock Exchange 100 index (FTSE 100) consists of the top 100 biggest market capitalisations on the London Stock Exchange (LSE). As of May 5, the FTSE 100 was at 7,491.18 points, down from 7,505.15 since the start of the year, a 0.03% drop year to date. Comparing global indices, the S&P 500, JP225, STOXX 50 and HSI are down 13.54%, 7.84%, 14.66% and 13.98% year to date.
How should investors go about in the UK market then? We would advise investors to invest in UCITS (undertakings for the collective investment in transferable securities) and ETFs (exchange-traded funds) listed on the LSE. UCITS funds are perceived as safe and well-regulated investments governed under certain laws and regulations by the European securities and market authority (ESMA).
What is an ETF?
See also: With Trump win boosting stocks, investors hunt for next winners
ETFs, also known as exchange-traded funds are investment funds that are used to track indices like the S&P500 index which tracks the US top 500 largest companies. It is listed and traded on exchanges like a stock.
From records, we observe that all three ETFs have competitive performance. However, when comparing the price of each ETF, ISF (iShares Core FTSE 100 UCITS ETF (Dist)) remains one of the most popular UCITS ETFs to be traded on LSE at GBP6.5 ($11.23) a share while VUKE (Vanguard FTSE 100 UCITS ETF) and HUKX (HSBC FTSE 100 UCITS GBP) are priced at GBP32.815 and GBP73.82 respectively.
Among the three ETFs, ISF and HUKX have an expense ratio of 0.07% while VUKE stands at 0.09%. An ETF investment requires the investor to pay a percentage for the mutual fund operating costs relative to the assets known as the expense ratio.
The expense ratio may be generally higher when there is a larger number of holdings, when taxes or legal expenses are involved or when the ETF has a low asset under management (AUM). A lower expense ratio maximises the investor’s earnings.
From Table 1, VUKE has 198 different holdings while ISF has 104, this is a significant differentiation, and having a higher number of holdings may help with diversification to reduce unsystematic risk but will also increase the expense ratio.
Another area investors should take note of when investing in an ETF is the holdings and weightage. Referring back to the table above, despite all three FTSE 100 UCITS ETFs having the same top holdings, each holding has a different weightage. HUKX has a slightly higher weightage on its top two holdings as compared to ISF and VUKE.
For more stories about where money flows, click here for Capital Section
Overall, we would say that all three FTSE 100 UCITS ETFs are relatively good for investing in the FTSE 100 index, which comprises UK blue chips.
Why blue-chip stocks?
Blue-chip stocks are well capitalised and have good business models favoured by investors, especially during a period of elevated volatility and risk of economic downturn. This trait attracts institutional investors due to its low-risk nature, which in turn generates liquidity for the market. From a retail investor’s point of view, this liquidity generated will catalyse the opening and closing of positions at your desired price in the market.
Home to one of the largest bluechip stock markets, LSE provides diversified equities and ETFs from around the world with more than 2000 securities, 1,400 ETFs, and 400 REITs (Real estate investment trusts).
Here are five UK blue chips in the FTSE 100:
Shell
As one of the biggest oil & gas companies in the world, Shell is seen to generate revenue of GBP393.3 billion in 2022 according to Bloomberg consensus. After the Covid-19 struck in 2020, the price of oil peaked at a new high since its highest in 2014. Shell’s revenue has been improving gradually, from GBP180.5 billion in 2020 to GBP261.5 billion in 2021. Despite the rollercoaster of events, Shell might have a rocky road ahead as it has lost Russia’s biggest energy project to China due to the ongoing sanctions.
AstraZeneca
AstraZeneca is a globally well-known pharmaceutical and biotechnology company, highly sought after since the pandemic broke out. Before that, AstraZeneca has also been growing steadily as seen in the table below and is expected to continue developing as Covid-19 transits into its endemic stage globally.
HSBC Holdings
HSBC Holdings provides financial services and a variety of international banking services. As seen from its previous year’s revenue, HSBC has maintained its performance. However, the ongoing Russia-Ukraine War, inflation fear, and a slowdown in China’s real estate performance have unfortunately resulted in bad debt problems. It reported 4% lower revenue for 1Q2022 and is expected to maintain or end the year slightly below its expected revenue.
Diageo
Diageo is an international beverage alcohol company, with global brands such as Guinness, Baileys, Johnnie Walker, and many more. Recovering from supply chain and inflationary pressure, Diageo sees sales growth in 1H2022. With strong growth anticipated in the coming years, Diageo remains one of the popular bluechip stocks for investors.
Rio Tinto
The world’s second-largest metals and mining company, Rio Tinto has been growing despite the rising cost of production. However, it has recently warned of rising costs for raw materials which could pose a threat to its growth. This is caused by the rising cost of oil and gas needed for refinery and mining operations. Therefore, the expected revenue is set lower in the coming years. Despite all these intersecting circumstances, Rio remains one of the top choices for investment.
Analysts’ recommendations
Table 2 shows the consensus ratings and average ratings of all analysts updated on Bloomberg in the last 12 months.
‘Low priced’ stocks vs penny stocks
Many companies listed on the LSE are considered “low priced” in terms of affordability. Unlike penny stocks in the US which have weak financial backing, LSE stocks are reputable companies with strong financial support. With just GBP1, investors can purchase up to one share of Rolls Royce or even two shares of Lloyds Banking Group.
UK stock price denomination
LSE stocks are usually denominated in pence, an example will be Shell, which is priced at GBX2,154.50, the “X” is denoted as pence and a “P” is denoted as pounds. Therefore, the actual price of Shell is GBP21.545 per share which is nearly half the price of Shell stocks listed on the NYSE at US$53.80 per share.
Top UK dividend stocks
Table 3 shows the dividend pay-out for the past financial years updated on Bloomberg. Investors should note that dividend payouts are dependent on the company’s financial earnings for the year and companies do not necessarily have to pay dividends.
UK market hours guide and in conclusion
Lastly, another advantage to trading on LSE is the ability to trade as early as 3pm Singapore time (SGT) on Poems. Regular UK market hours start from 3pm SGT to 11.30 pm SGT during Daylight Saving Time (DST). For Non-DST, trading hours will be from 4pm SGT to 12.30 am SGT. This allows investors from Singapore to trade as early as 3pm SGT between Singapore/Hong Kong/China closing and US opening market trading hours. By doing so, investors have access to more readily available global market information as well as the ability to participate in multiple global markets within a single day.
Although the UK market this year is beset by many macroeconomic downturns, much like the rest of the world, we believe knowledge and strategies to leverage products available on the FTSE100 will help investors ride the waves in choppy waters, making well-informed decisions to profit from your investments.
Thng Xiao Xiong is UK equity dealer, Phillip Securities, global markets desk and support
