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UK shares disappointed in 2015, with the FTSE 100 losing 5% of its value. The biggest losers were those linked to natural resources, as commodities underperformed all other asset classes for a third successive year and produced their lowest annual returns since the 2008 financial crisis.
Oil, iron ore, copper, gold and corn all lost half their value last year, dragging down mining stocks. In fact the four biggest FTSE 100 losers of 2015 were Anglo American (AAL) which fell 70%, Glencore (GLEN) down 66%, Antofagasta (ANTO) which lost 36% and BHP Billiton (BLT) fell 35%. Rio Tinto (RIO) and Royal Dutch Shell (RDSB) came in eighth and ninth place respectively, losing 23% and 22% over the year.
And there is little respite in sight. Looking into 2016, not one of the leading commentators is bullish on commodities with most recommending underweight positions including Goldman Sachs, JP Morgan and Citi, according to Andy Brunner, head of investment strategy for Morningstar UK.
Liontrust Macro Equity Income fund manager Stephen Bailey says that while demand for commodities has weakened, the bigger problem is that the miners haven’t adjusted their output accordingly, meaning prices have tumbled.
“This has created a vicious circle where miners need to boost supply in order to maintain cash flow and dividends, only leading to further price falls,” he said.
“The miners have also protected cash flows and dividends by slashing their investment in improving existing facilities or acquiring new sites.”
Bailey suggests mining companies should be taking a long-term approach and exploiting the temporary downturn to pick up undervalued assets from distressed sellers such as Glencore.
However he concedes that this would mean they put long-term investor returns ahead of short-term dividends.
What Next for the Oil Giants?
Stephanie Flanders, JP Morgan economist, says that the fall in oil prices suggests that the UK stock market of 2016 may show a similar pattern to 2014 and 2015, with the index underperforming but large parts of the market doing quite well, especially sectors that are close to the domestic consumer.
“It is unusual for the consensus trade – avoiding commodity stocks – to deliver such a high degree of outperformance. Sooner or later the tide for commodities will turn and it will be more difficult for managers to beat the index,” she said.
Banks Lose Out in 2015
It was not just oil and mining stocks that were hammered in 2015. Banks took a battering as well. Standard Chartered (STAN) suffered from a heavy weighting in troubled China, losing 33%, Royal Bank of Scotland (RBS) fell 22% and HSBC (HSBA) shares lost 6%.
Bailey said that regulatory pressures meant he held no UK large-cap high street banks in his fund, preferring to own a selection of smaller ‘challenger’ banks.
“RBS revealed a bill of £967 million for litigation, misconduct and restructuring costs in the third quarter of 2015, while Standard Chartered confirmed rumours of a rights issue and cancelled its final dividend,” he said.
“On a regulatory level, banks are being forced to increase their capital buffers, an expensive process. And on an operational level they are burdened by a creaking IT infrastructure and an outdated business model.”
