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These stocks have been shunned for years. Now investors love them

<i>Vuk Valcic/SOPA Images/LightRocket/Getty Images</i><br/>Old-time bank
SOPA Images/LightRocket via Gett
Vuk Valcic/SOPA Images/LightRocket/Getty Images
Old-time bank

By Anna Cooban, CNN

London’s premier stock index is roaring back to life as investors turn their backs on Big Tech to favor old-time bank, oil and mining stocks.

The FTSE 100, whose constituent companies are collectively valued at $2 trillion, hit an all-time high of 8,013 points on Thursday, notching its eighth such feat in two weeks. It slid back slightly on Friday but is still 17% above its recent low in October.

It’s a cheery turn of events for an index that some investors and analysts have long derided as a “dinosaur” heading towards extinction, burdened by the old-economy stocks — big finance and commodities companies — that make up the bulk of its value.

Analysts say the FTSE’s resurgence signals a broader paradigm shift among investors: An increasing appetite for “value” stocks — those seen to be trading at a price below their true worth — at the same time as high-growth tech stocks are falling out of favor.

It was not always so. The index has more than doubled since the global financial crisis in 2009 but that pales in comparison with the S&P 500, which more than quadrupled, and the tech-heavy Nasdaq Composite, which has ballooned 1,000% over that time.

The FTSE 100 is not a proxy for the UK economy, which is teetering on the brink of a recession, because companies in the index make most of their revenues overseas.

Rather, it’s the kind of firms making up the FTSE 100 that explains its revival.

Although the mix of the industries in the FTSE is “more traditional,” that doesn’t mean they’re “dinosaurs,” says Andy Griffiths, executive director of The Investor Forum, a group representing investors in UK equities. “It means there’s less disruption in the makeup of the index compared to others like the Nasdaq,” he told CNN.

Put another way, blue chip companies in “defensive” sectors — those providing essential goods or services and which generate reliable income for investors through dividend payments — are a better bet right now than highly-indebted tech companies offering services that consumers are likely to ditch in times of economic stress.

‘Free money’ era over

After a bumper 2021, the S&P 500 tumbled by more than 19% last year, its worst performance since 2008. The Nasdaq, the place to be since the mid-2010s tech boom, fell by almost a third.

Some of its biggest names have foundered: Apple’s stock is down 16% since hitting its all-time high January 2022, and shares in Facebook owner Meta have sunk by a whopping 55% since their record high in September 2021. Other tech giants — Alphabet, Amazon and Microsoft — have announced thousands of layoffs in recent weeks.

Both US indexes have recovered slightly following last year’s big falls, but one of the biggest drags on their performance — high interest rates — is likely to stick around. Jerome Powell, chairman of the US Federal Reserve, said last week that the central bank would keep rates elevated for the time being, despite inflation ticking downward in recent months.

More than a decade of rock-bottom interest rates has been a boon for tech companies. That’s because, when interest rates are low, the yields on government bonds are also low.

That boosts investors’ appetite for riskier investments, such as the stocks of small or highly indebted tech companies that could make blockbuster returns years down the line. But when interest rates are rising and inflation is high, profit expectations decline, making high-risk companies less attractive.

The end of the “free money” era has changed investors’ calculations, according to Griffiths, as debt, or leverage, is now more costly. “The state of the world has changed dramatically,” he said. “It’s been quite easy to fund unprofitable businesses through leverage over the past 10 to 15 years.”

Paying dividends

For the FTSE 100, it’s a different story.

Interest rate rises have boosted earnings for big international banks, while oil and gas prices — which started rising in the fall of 2021 but soared to multi-year highs after Russia’s invasion of Ukraine last February — have led to staggering profits for energy producers.

BP and Shell, both FTSE companies, more than doubled their annual profits last year to a combined $68 billion. Their stocks have shot up by 46% and 24% respectively since the war broke out.

China’s reopening of its economy in December after more than three years of pandemic restrictions has also boosted the outlook for the commodity-heavy index, Max Newman, director and portfolio manager at wealth management firm Julius Baer International, told CNN.

Michael Hewson, chief markets analyst at CMC Markets, said in a note last week that the “often-unloved” index was back on investors’ radars again.

“In this new era of rising interest rates… the UK blue chip [index] has come back into favor not only for its more defensive qualities, but also for the ability of the companies contained within it to generate an income for shareholders,” he wrote.

The index’s dividend yield, or the average annual return an investor can expect as a proportion of their total holdings, is generally higher than that of either the S&P 500 or Nasdaq Composite, Hewson said. At the moment, the FTSE’s yield is 3.8%, while the S&P 500’s is 2.1% and the Nasdaq’s 1.5%.

But, over the past decade or so, it has been the promise of bumper cashouts from fast-growing tech stocks, rather than incremental returns through dividends, that has reeled in investors.

The FTSE is also a bargain. It trades on a price-to-earnings ratio — a measure used to determine whether a share is over- or undervalued — of 12, compared with the S&P 500’s 21. The higher the ratio, the more likely a stock is overvalued.

But the lack of tech companies may come back to haunt the FTSE, once inflation and interest rates fall back. Since August, wholesale gas prices, which have boosted energy producers’ profits, have fallen back to their pre-war levels.

“There are fresh winds of worry blowing in about just how far interest rates will continue to go up in the United States,” Susannah Streeter, senior investment and markets analyst Hargreaves Lansdown, told CNN.

— Julia Horowitz contributed reporting.

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