A glance at the above chart of the FTSE 100 illustrates a recent recovery in equities as the uncertainty surrounding the US presidential election has passed.
US equities, which usually set the global market mood, have dominated sentiment after a sharp rally since Donald Trump won the White House, with investors welcoming his pledges to boost infrastructure spending and a lighter regulatory touch.
Four of the most closely watched US indices; the broad S&P 500, the big blue-chip Dow, the technology focussed Nasdaq and the small-cap Russell 2000 all closed at a record high earlier this week for the first time since the height of the dotcom bubble.
Strong economic data has helped US equities shrug off a stronger dollar, which can raise concerns about exports’ competitiveness. Durable goods orders smashed expectations in October, while weekly jobless claims fell to a four-decade low and housing starts reached a nine year high.
The dollar index, a measure of the US currency against a basket of its peers, hit a fresh 13-year peak this week to 101.75, its highest since March 2003. A combination of strong growth and Trump’s plans tempted investors to price in a 100% probability that the Federal Reserve will raise borrowing costs by 25 basis points on December 14.
On a domestic front, however, the UK markets have been tempered by the strong dollar, which inadvertently weighs on our heavyweight oil and mining sectors, hence the FTSE remains circa 5% away from its corresponding highs.
Oil has faded recently as hopes that the Opec cartel will agree a production cut fade, while data revealed a bigger than expected rise in crude inventories to 490.3 million barrels, well above the November average. Miners struggled for momentum, as commodity prices came under pressure, including gold which fell to fresh five-month lows, and iron ore, which saw its worst one-week loss since May.
Technical analysis of the FTSE 100 suggests a new upward trend has emerged over recent week, supported by the escalating oscillators and the positive MACD histogram. Minor resistance could come from the 50-day moving average at 6855, otherwise the index could retest the high at 7130. Meanwhile, support is seen in the very short-term at 6815 or from the recent low at 6660.
In conclusion, US markets continue to achieve fresh peaks, while complacency and euphoria, traits that are normally associated with the top of a cycle, are far from evident. Global data is largely improving, while central banks and governments remain supportive of growth, so I expect equities to remain the preferred asset class as we move into 2017.
A record amount of cash flowed into US stocks following the presidential election, underlining the renewed appetite for equities after what has been a testing political year. Money managers have been piling money into the US economy, with more than $30 billion flowing into US stock funds in the week to November 16.
The financial, healthcare, construction and industrial sectors, likely beneficiaries of the Trump administration, were among the best performers. A related stock I have been monitoring is Ashtead (Epic: AHT), a FTSE 100 listed international equipment rental company with national networks in the US and the UK.
Ashtead’s American subsidiary, Sunbelt, is the second-largest equipment rental provider in the US and generates over 85% of group revenue and 90% of profits. As most of its construction clients operate in the non-residential market, any increase in infrastructure spend should drive business.
With high operational gearing, management target a 60% drop-through from revenue to cash profit, which also benefits from the continued strength of the dollar as it is converted back into sterling. Ashtead plans to increase its geographical coverage by 50% over the next five years, which Sunbelt and Donald Trump should help them achieve.
The London-based group trades on 13.7x earnings, a discount to historical years and with 17% growth forecast next year, it puts them on an attractive PEG of 0.80. The 1.9% dividend may not appeal to all investors, but it has steadily risen over the past decade and with four-times cover from earnings, it has further room for expansion.
The chart of Ashtead shows the steady growth already experienced over the past year. Election euphoria helped the shares to break through the all-important 1377p resistance level, creating a new all-time high for the stock. Despite the strength, the oscillators have some-way to go before becoming acutely overbought and previous resistance should now provide strong support to any pullback.
Economic strength in the US, the Trump administrations focus on infrastructure spending and the strong dollar all look set to benefit Ashtead over the next year.
At the time of writing the share price is 1496p and I believe investors should look to enter Ashtead below 1440p, allowing traders to place a tight stop-loss beneath support at 1375p, while upside targets are seen at 1518p, 1579p and 1688p.
This report was written by Michael Allen, equity specialist. The writer does not hold a position in Ashtead. The material in this report has come from web-based data sources and Ashtead’s corporate website.