FTSE Gains Quarterly, But Some Outliers Still Down

UK's FTSE 100 performed strongly in the recent quarter, but some constituent stocks significantly underperformed while the overall UK benchmark gained, prompting questions of whether it is time for a rebound.

Footsie Quarterly Outliers

Closing just below the 8000 level for the quarter, shy of all-time highs, FTSE overperformed despite the UK experiencing a brief recession last year. However, company-specific news pushed certain outliers, such as Ocado and JD Sports, in the red for the quarter. Despite rebounding last month on the back of stronger resources firms, mining companies like Fresnillo and Rio Tinto could not fully recoup losses stemming from earlier in the year. Their shares fell due to declining commodity prices as China's economic growth stalled.

Market participants expect the BOE's interest rate cuts to continue supporting stock prices. Last month recorded the best performance since November 2022, thanks to mining and retailers. Therefore, market analysts will monitor individual companies that underperformed the broader FTSE 100 to determine if their share prices now present attractive long-term investment opportunities given improved macroeconomic expectations. A rebound in China's commodity demand could also benefit raw material producers that struggled in the first quarter.​

Potential for a Rebound?

Certain sectors offer good prospects for positive performance going forward. Homebuilders may be one such area. High interest rates have significantly impacted the housing market through increased mortgage costs, depressed home prices, and reduced transaction volumes. However, expectations that the BOE will begin easing later this year imply that mortgages will become more affordable. As a result, a rebound in the UK housing market may ensue. Barratt Developments is a possible homebuilder candidate as its share price declined approximately 15% in the first quarter, partly due to CMA's review of the Redrow merger. Assuming approval of the combination, Barratt could partake in the potential upside. The company reported increased purchase inquiries and private reservations in the first half.

Another firm facing unusual challenges in the opening quarter includes Sainsbury's, which announced a leadership transition and plans to divest its financial services division. Underperformance at Argos also disappointed the market. However, those results came amid the UK entering a technical recession. With inflation moderating and cost-cut measures taking effect, the company may see switch gears when reporting full-year earnings later this month. In its third-quarter trading statement, Sainsbury's reaffirmed guidance, consistent with analyst consensus forecasts for achieving underlying pretax profit targets.​

Barratt Stock in Short-Tern Range

Barratt Developments' stock price has seen a correction after encountering resistance at the 580 mark, representing the upper trendline of its prevailing channel pattern. While it continues to trade above the lower boundary near 450, the upward trend is expected to persist.

The stock appears to trade within a narrow range between 460 and 485 in the short term. A breakthrough above this area could catalyse an advance towards 515. Conversely, a breakdown could precipitate a decline to 430, particularly if momentum builds.​

Source: SpreadEx / Barratt Developments

Key Takeaways

While Footsie gained last quarter, some stocks underperformed significantly, prompting questions about whether a rebound may be due. Closing just shy of all-time highs despite a brief UK recession last year, company-specific news drove certain outliers down. Despite rebounding on stronger resource firms last month, commodity price declines hurt miners like Fresnillo and Rio Tinto. Looking ahead, further BOE rate cuts are expected to continue supporting stocks, and certain sectors, such as homebuilders, may close the gap if easing mortgage rates boost the UK housing market, with Barratt Developments a potential candidate.​