FTSE100 on course to post its best year since 2009

Michael Hewson (00:00)
Hello, welcome to this week’s podcast brought to you by the Good Money Guide and our sponsors Pepperstone who are a multi-regulated CFD broker providing trading services in forex stocks and commodities and multiple destinations. I’m Michael Hewson in a very Christmasy jumper and joining me once again is Pepperstone Senior Market Strategist Michael Brown doing his best impersonation of Scrooge.

Michael Brown (00:20)
Very

good afternoon, for our listeners who don’t have the video, can describe Mr. Hewson is wearing a very garish blue and green and red Christmas jumper and well safe to say I am not because I’m not coming into the city wearing anything that looks quite as festive as he’s got on there.

Michael Hewson (00:40)
All

you’ve to do is put it in your bag and take it out just for the podcast, mate. I mean, I know you just got off the back of a podcast, not a podcast, a press conference from Christine Lagarde, but I mean, that’s no reason to be miserable.

Michael Brown (00:51)
Well,

sources say I was there, depending on who you think my doppelganger is in the crowd, but we can leave that one for another time.

Michael Hewson (00:59)
Yeah,

indeed, indeed. Well, this is going to be our last podcast of the year. Certainly been an interesting 12 months before we get into the guts of it. Let me quickly do the risk warning. The information provided here, whether from a third party or not, isn’t to be considered as a recommendation or an offer to buy or sell or the solicitation of an offer to buy or sell any security financial product or instrument or to participate in any particular trading strategy. We advise any readers, viewers or listeners of this content to seek their own advice.

Michael Brown (01:04)
Indeed.

Mm-hmm.

Michael Hewson (01:28)
Spread bets and CFDs are complex instruments and come with a high degree of risk of losing money rapidly due to leverage. 72 % of retail investor accounts lose money when trading spread bets and CFDs with this provider. Okay, so we’re gonna do a slightly different format, I think today. I think we’re gonna look back at the last 12 months, what’s done well, what hasn’t done well. Obviously what’s been driving markets this week and which has been a pretty data heavy week, if truth be told.

Michael Brown (01:49)
Mm-hmm.

Yeah.

Michael Hewson (01:56)
But ultimately, I think this will be the sort of last hurrah, I think, for data before we return in early January when we will get a whole host of new data to dissect and chew over. So to recap what we’re going to be talking about today, obviously what’s driven markets this week, we’ve had the ECB unchanged, which was a bit of a snoozeville. US inflation slowing to 2.7 % from 3%. Jobs report.

Michael Brown (02:09)
Hmm.

Michael Hewson (02:25)
bit of a meh. So you can talk about that. Michael, look at the US economy on a broad brush basis. US retail sales are pretty good actually, I think, given the background of the government shutdown, albeit the government did reopen on the 12th of November. We look at the Bank of England decision, the rate cut that was announced earlier today, the UK data that we’ve seen this week that’s prompted, I think, Andrew Bailey to switch his vote, which we

pretty much predicted he would. We’ll look back at the performance of the FTSE 100, the FTSE 250, the pound, banks, general discussion really about what’s done well, retail, oil and gas and what have you. And also talk about a certain Labour MP who seems to be taking credit for the performance of the FTSE 100 this year. Oh, he hasn’t, he hasn’t blocked me. You got away with that, you? Okay. You should see some of the comments.

Michael Brown (03:13)
And that MP still hasn’t blocked me yet, so… No, I’ve got away with that somehow.

Michael Hewson (03:23)
when he retweeted my Substack post. mean, yeah, pretty much all of the same vein. Also look at today’s story du jour, BP replacing its CEO, long overdue in my opinion. And certainly I think BP could be one to watch in 2026. Looking back also at, you know, obviously what’s gone badly this year. Number of companies that shunned UK investment.

with the possibility that Rolls Royce could go down the same route. So we’re going to certainly be chatting about that. Quickly talk about Broadcom’s results in the context of the wider AI story, I think. And Curry’s reported some fairly solid first half numbers earlier today and their shares are up 9%. So let’s get cracking, shall we? ECB.

Michael Brown (04:03)
Yes.

Well that’s the easiest one to tick off the list because they kept rates at 2%, Lagarde said they’re in a good place and they’re not going to do anything for quite some time you would imagine so let’s

Michael Hewson (04:08)
Yes.

So why did you spend the entire press conference listening to it then?

Michael Brown (04:20)
I spent the entire press conference looking to see whether a certain German journalist was in the audience, if I’m being completely honest. And he was, and he got his question. For anyone who is unfamiliar, go and have a gander at my Twitter feed and you’ll find out what we’re going on about. There’s sort of worrying premonition of what I could look like in, well, I was going to say 20 years time, but the way things are going, maybe more like five.

Michael Hewson (04:27)
And he was, wasn’t he?

Well, let’s hope that your questions are of much better quality than his.

Michael Brown (04:47)
That is a very low bar, but I will take the compliment regardless. ⁓

Michael Hewson (04:52)
Okay,

so what did you make of the US data this week? Obviously we had the payrolls report. We had US CPI, which was actually surprisingly weak. So what does that mean for potential rate cuts? And certainly would it make one of the two Kevin’s job any easier when they replace Powell in May?

Michael Brown (05:02)
Yeah, I mean…

Well, I think we need to take the CPI data with a humongous pinch of salt. Obviously, headline coming in at two spots, 7 % down from the 3 % that we saw in September. Core CPI at 2.6%, also down from the 3 % that we saw in September. This was well below consensus expectations, really a massive cooling in price pressures if you look at the headline metrics.

However, I think there’s a couple of things that I’m slightly concerned about here. Obviously, the BLS didn’t collect any data in October because of the government shutdown. So a lot of the prices for October have either been, well, guessed or just zeroed off, which will obviously bring inflation lower. The other thing is that the collection window for the November survey was effectively the last two weeks of the month as opposed to doing it all throughout the month. What happened in the last two weeks in November?

Thanksgiving, Black Friday, Cyber Monday, in other words, a hell of a lot of discounting. So I think the numbers have been sort of artificially skewed lower, if you like, and I would expect that to correct in the reports that we get in the early part of next year. So I think the Fed will probably look through the inflation data to a certain degree.

In terms of the jobs report that we got earlier in the week, obviously headline payrolls rising by 64,000 in November. That was after a decline of 105,000 in October. The October decline was pretty much all driven by government payrolls, largely as a result of the deferred resignations from earlier in the year. The November gain was driven pretty much entirely by healthcare.

The healthcare sector added 64,000 jobs on its own. Without that net job creation would have been zero. Unemployment rose to a new cycle high at four spots, six percent. But again, I think the jobs report just gives us evidence that the US labor market is continuing to stall. The overall vibe, the overall atmosphere is one of relatively little hiring and also relatively little firing, which supports the case for the Fed to deliver further policy easing in the early part of next year.

Michael Hewson (07:14)
Right, okay, so I mean obviously if you look at the ADP report for November that was a negative number of 32,000 I believe.

Michael Brown (07:21)
It was, you’re absolutely right. of course ADP only references private sector jobs.

Michael Hewson (07:26)
which generally for me I think tends to be a better indicator of the health of the wider economy. Unless obviously you’re the UK and then anyway that’s another story. So obviously we’ve got non-farm payrolls on the 9th of January, first week back. Any sort of clues as to whether or not we’ll see a slight resetting of the narrative when it comes to jobs there and unemployment and what have you? Because I did note that the participation rate edged up as well.

Michael Brown (07:32)
absolutely.

Yeah.

Yes.

yen

Michael Hewson (07:54)
along with the unemployment.

Michael Brown (07:54)
It did.

That’s right. Yeah, you’re absolutely spot on. That’s important to mention, up to 62 and 1 I believe. It’s obviously far too early for any sort of forecasts for the December jobs report that we get early in the new year. But I think really it’s going to be a case participants looking at that and policymakers and going, the bar for that jobs report to deter the Fed from delivering another cut in January, it would need to be very, very indeed.

in order to get the Fed seriously thinking about, you know, pausing this easing cycle. You know, obviously we will wait and see what that data says, but I think at the moment all signs point to further labour market slack developing in the US.

Michael Hewson (08:36)
So another right cut and genuinely fib.

Michael Brown (08:38)
You would certainly expect so at the end of January.

Michael Hewson (08:40)
Well that’ll please Mr Trump.

Michael Brown (08:42)
Well, exactly. Although he has been sort of suspiciously quiet in the aftermath of that CPI data. I was expecting to hear a, too late, Jay Powell is a moron on Truth Social or whatever it might be. But he hasn’t said anything.

Michael Hewson (08:52)
Mm-mm.

I don’t know why he’s wasting his breath to be honest. mean, he’s going to replace him. He’s going to be out in May. you know, then they’ll have his own man in there. Anyway, let’s move on. UK Markets Bank of England and this week’s UK data. Not a pretty picture.

Michael Brown (09:01)
exactly that.

No, not at all. mean, in a nutshell, unemployment continuing to rise, new highs, 5.1%, payroll employment down for 12 of the last 13 months now, public sector earnings growing at almost double the pace of earnings in the private sector, which is clearly unsustainable.

We did have some good news on inflation, must be said. Headline inflation coming down to three spot two percent in November, down from the three spot six percent that we saw previously. Core and services CPI also coming in a little bit cooler than expected. So obviously enough in there to reiterate the picture that the UK economy is one where price pressures are fading slowly but surely. The labor market is weakening relatively rapidly and

Of course we know that we’re getting no economic growth and we haven’t had any since the summer. So no surprise that the BOE delivered a 25 basis point cut today. I think what is surprising is that it was a 5-4 vote. I was expecting one or two of those hawks to be a little bit more convinced by some of the figures we’ve had this week, but they’re still holding out. And I do think there could be quite a lot of air-gon faces on Threadneedle Street at some stage.

Michael Hewson (10:12)
You could well be right. But obviously food inflation, I think that contributed on a monthly basis to the bulk of the slowdown because that slowed from 4.9 % to 4.2%. But services still remains pretty sticky. And I think that’s likely to remain so. And I think that’s probably what’s giving some of these more hawkish members a little bit of pause. And how do you explain what guilt yields have done today?

Michael Brown (10:34)
Mmm.

Well, we’ll get onto that in a moment. I can understand why it’s giving people pause for thought, but I think the important thing is that, yes, services CPI at 4.4%. We know that’s not ideal, but…

it is those metrics are still coming down faster than the Bank of England had penciled in in the November economic projections. So when you’re using that as the sort of yardstick, actually progress is being made and better progress than we thought is being made. The reason why GILTS are trading softer across the curve in the aftermath of the rate cut today is because the bank included a new line in their statement, which said, and let me just get the quotes, I make sure this is right, they noted that judgments on further easing are likely to become

a closer call. This is something that we knew was going to happen as you get closer towards the neutral rate and you’re sort of feeling your way along as to where bank rates should settle. Policy makers have obviously diverging and differing views as to where that neutral rate stands, whether further policy easing is necessary. So the bank, you could argue, and I’m not sure I want to argue it too much, but you could argue it was a hawkish cut by adding that line in saying,

cutting today we are going to continue on this gradual downwards path but it’s going to be a much much closer call as to when we deliver those further rate reductions.

Michael Hewson (11:53)
Yeah, did you see that tweet that Rachel Reeves put out? said, because of the measures announced in the budget, inflation has come down. Completely ignoring the fact that this is November CPI and the budget was on the 26th of November. So I don’t know what planet she’s inhabiting, but it’s certainly not this one.

Michael Brown (11:57)
⁓ don’t tell me she’s trying to claim credit for it.

No, also this whole idea of making interest rates political just winds me up. mean, you know, it was actually a Labour government, of course, Gordon Brown back in 1997, that gave the bank operational independence to set policy to achieve the inflation target. Well, I do, but you’re going to explain.

Michael Hewson (12:24)
But you know why he did that, don’t you?

Well, basically because he knew that the markets were very skeptical about Labour’s ability to not manipulate interest rates prior to or leading up to an election or any sort of election. And it was to basically mitigate those concerns that financial markets had about politicians manipulating interest rates. So for everyone who criticises the Bank of England and says they shouldn’t be independent, that’s one of the reasons why.

Michael Brown (12:37)
exactly.

Yeah, exactly.

Michael Hewson (12:50)
and

you need to be careful what you wish for because ultimately yes it’s not a particularly great model but it’s certainly better than the alternative.

Michael Brown (12:57)
Yeah, absolutely. And I think that’s very, very important. Yes, the Bank of England have their faults, and they have had their faults over the years. we’re always going to have people who disagree with what they’re doing. But it is the best of all the systems that we’ve got. And there’s a reason why it is the convention across developed markets to have an independent central bank.

Michael Hewson (13:03)
Hmm. Yeah. Well…

mean everyone’s complaining about the fact that Trump is trying to exert influence over the Federal Reserve and they’re pushing back against that. By the same token, do you think that things would be any different, whether it be a right-wing government or a left-wing government, when it comes to the Bank of England? I don’t care what flavor government you are, the Bank of England or the central banks.

Michael Brown (13:29)
Mm-hmm. No, absolutely not.

Michael Hewson (13:34)
need to have their independence because then ultimately you then can only criticize them on the competence of their policy decisions, not on the fact that they are unduly manipulated by certain politicians.

Michael Brown (13:46)
Yep,

absolutely spot on.

Michael Hewson (13:49)
Okay, Fabric Cut, yes or no?

Michael Brown (13:52)
do you know what?

It’s hard. I am going to do a bit of economist fence sitting now. I would not be at all surprised. And obviously we’ve got quite a lot of data to come before the February meeting, but I can sort of see a world where they deliver one more cut in February, get bank rate down to three and a half percent, and then almost use the latest forecast round at that February meeting to justify a tweak to the guidance and signaling that, you know, we are now at terminal and we’re done and dusted. You know, a lot of estimates of new

Michael Hewson (14:19)
Hmm.

Michael Brown (14:24)
between 3 and 4%. You’re bang in the middle of that range. I would probably argue that we need to take bank rate down to about 3 % given the shocking state of the labor market. But you’re not going to do that when inflation is running at 3.2 because you want to hold a positive real bank rate. So yeah, I think this is a classic case of actually what I think the bank should do is very different from what the bank will do. And I think the risk with that is of course that the MPC then signal that they’re done

find

themselves behind the curve three months later, you’re looking at five and a half percent unemployment, inflation’s come down much quicker than you expected, and then you’re chasing your tail. But I would pencil in another cut in February right now, but dependent on how the data evolves, of course.

Michael Hewson (15:04)
I you need to see CPI below three. I think that makes the argument more compelling. It’s at 3.2 % along with core CPI. I think if you can get that number under three, then another break up becomes much more likely. I think the elephant in the room for me is unemployment. I think there’s a good chance we could see 6 % by the end of 2026, if not before. I mean, this time a year ago.

Michael Brown (15:09)
Hmm.

Yeah.

Michael Hewson (15:32)
I thought there was a distinct possibility we could see 5 % by the end of this year. We’re already there. unless… Go ⁓ on.

Michael Brown (15:38)
Well, I think that…

I was

just I think the big thing with with late the labor market, not just the UK labor market, but everywhere is, know, once it starts to weaken, you’ve got to go what what’s the catalyst for that to change? What’s the catalyst for that trend to change direction for the labor market to strengthen again? And you look and you go, well, unless lower interest rates are going to do it and actually market based interest rates are higher, as we’ve discussed, there isn’t much of a catalyst to actually spark a significant turnaround in the labor market. So yeah, I would fully agree with you. I mean, we’ve

lost somewhere between 20 and 30,000 jobs in each of last three months. Unless you start to see that stabilized pretty damn quickly, you’re going to get to five and a half, six easily.

Michael Hewson (16:19)
And we’ve had 82,000 added to the public sector payroll. There or thereabouts. It’s around about 80,000. I think I read that somewhere. And I’m thinking, well, that’s just nonsense. mean, you’re getting fewer private sector jobs, funding more and more public sector jobs. Well, that’s just not sustainable. It’s not sustainable now. And it will become even less sustainable as we head into 2026. Anyway, I think regular viewers will know our views.

Michael Brown (16:22)
Mmm. Yeah.

Mm.

Michael Hewson (16:43)
on this government government, which basically the and the quality of their MPs, which brings me on. Yeah, it does. Let’s look at a let’s look back at the performance of the FTSE 100 this year and probably been the best performance since 2009 on an annual basis if we managed to hold on to the gains that we currently have. It hasn’t outperformed the DAX. Well, it’s roughly equivalent to the DAX, but the DAX is obviously a

Michael Brown (16:47)
Well that brings us nicely onto this doesn’t it actually, yeah.

Michael Hewson (17:13)
any real return index, total return index. So if you add dividends to that, then the FTSE is done even better. It hasn’t performed better than the Nikkei 225, however, which is up over 25%. But that’s basically down to a weak currency. ⁓ I obviously wrote a piece on that, which I posted on my sub stack. It’s quite obvious to me that Mr. Triss Osborne

Michael Brown (17:15)
Yeah, total return, isn’t it? You’ve got the dividends in there,

Yes.

Michael Hewson (17:38)
didn’t read the article because if he had, he’d know that I’d torn his government a new one in it. But not that they need many new ones torn. I probably had so many written over the course of last 12 months that it’s probably looking a little bit ragged at the moment. But the FTSE 100 is not the UK economy. We know that. Every finance professional knows that. And I think the less said about MPs, the better, apart from the fact that maybe they should read more.

Michael Brown (18:03)
Well, yeah, I would fully agree with that. think, you know, let’s not take anything away from the FTSE 100. We have had a very, very strong year. The performance of the benchmark has been great, and as you just sort of compared it to other equity indices, we’ve also, you know, I think we’re, what, the S &P’s up what, 9 % this year, 10 % this year? Something like that. So we’ve outpaced US equities, which has been the perennial thing that we all throw, and I’ve been guilty of it, throwing it at the London market. We’re always lagging behind the US. Well, this year…

Michael Hewson (18:31)
about 15.

Michael Brown (18:32)
there we go. Well, this year has been different, especially when you add the dividends in. Now, that is not to say that it’s been a great year for the UK economy because 80 % of FTSE 100 companies earn their revenue overseas, which is why when you look at the FTSE 250, which obviously we just alluded to, we’re trading 6 or 7 % higher on the year. And that is the reflection of how the market is viewing the UK’s economic performance, which is effectively going absolutely nowhere.

Michael Hewson (18:48)
Hmm, that’s exactly that.

Yeah, I I made that very, very point because over the course of since the financial crisis, the FTSE 250 has performed way better than the FTSE 100. But the FTSE 250 posted its record high in 2021. Since then, it’s gone lower. And that the reason for that is a combination of incompetent economic policy from the Tories and has been continued on steroids by Labour.

Michael Brown (19:15)
Yes.

Hmm.

Michael Hewson (19:27)
And as a consequence of that, is it any wonder that FTSE 250, the smaller benchmark, has struggled along with pretty much every other UK-based market? FTSE 100 has done better, largely on the basis of a weaker pound, but also on the basis of concerns about rich valuations in the US, driven by the Trump trade, as people lighten their portfolios in the US and move their money into Europe.

Michael Brown (19:35)
No, of course it’s not.

Mm-hmm.

Michael Hewson (19:51)
and the UK. If you look at the FTSE MIB, if you look at the Spanish IBEX, those indexes have done even better than the FTSE 100 up around about 25 or 30 percent.

Michael Brown (20:01)
Yeah, and I’m going to get this in the wrong order. So please correct me I’m wrong. But one of those has taken out its

post-crisis high, I want to say it’s the FTSE MIB and the IBEX, I think has actually hit a record high this year. It may be the other way around, I’m not entirely sure. But yeah, you’re absolutely right. That shift in asset allocations from years of massively overweight US equity to, you know, think on balance people are probably still overweight US equity, but they’ve just trimmed that. And even trimming it to a small degree has shifted so much capital out of the States and into markets in Europe, into markets in Japan. And that is, you

the primary reason why we’ve seen this rest of the world outperformance this year, even though, you know, this is something I find interesting that you look at the numbers and you actually go, rest of the world has massively outperformed the US this year. If you look at the narrative, it’s all been tech, AI, bubble, blah, blah, blah. Well, we all know there’s no real tech stocks in Europe. So actually, guys, the narrative isn’t it’s all about tech. It is actually quite a broad-based rally.

Michael Hewson (20:50)
Hmm.

And you think about how European markets performed over the last 10 or 15 years, they have underperformed relative to the US. The US has stood out. Now what you’re seeing now is a slightly, you know, resetting of that outperformance as people move money back into Europe. Spain is up over 40 % and Italy was up over 25 % respectively. I think I wrote that in my note.

Michael Brown (21:05)
Hmm.

Michael Hewson (21:24)
You know, and if you compare that to the performance of the Magnificent 7 this year, you know, it’s been fairly good. Apart from the likes of Amazon, which is pretty much traded sideways, the outperformers this year from the Magnificent 7 have been Alphabet, which is up over 60%. As of the last time I checked, we could have seen a bit of a sell off in the past few days. So that could be slightly out of date.

Michael Brown (21:30)
you

Yeah.

Mm.

Michael Hewson (21:52)
but also in video.

Michael Brown (21:54)
Mm. Yeah. Well, and Nvidia have. Yeah, well, I was going to say the Magnificent Seven have sort of become.

Michael Hewson (21:56)
strip those two out

Michael Brown (22:02)
What the terrific to this year if I can coin that one? You know if you take out alphabet who’ve obviously surged over the last six months or so on all this TPU stuff Nvidia are up 30 odd percent on the year but they have sort of come off the boil a little bit in in recent weeks since the You know sort of back end of October, but again, you know that Speaks to me to the fact that it’s not just these stocks that are propping the market up You know, you can’t pin all of the the gains that we’ve seen this year on upside in the magnificent seven because

Michael Hewson (22:04)
Yeah. Yeah.

Michael Brown (22:30)
because, well, very simply, there hasn’t been much.

Michael Hewson (22:33)
No, and Apple’s only up around about 5 or 10%. So, you know, and that was only in the last three months of this year. Tesla, Amazon and Apple were all in negative territory for the year until the last quarter of this year. So they mounted a modest recovery. But certainly I think there’s an awful lot more skittishness about valuations now.

Michael Brown (22:54)
There is, and I think people are…

taking a much more sort selective view of the whole theme. And I think this is probably something that we’ll see continue into 2026. And you just start to wonder whether, you know, are we going to see these sort of two sides to the AI trade where you’ve got the hyperscalers that are funding all of this through revenue and through free cash flow and the market looks on that in a positive light. But then on the other side, you’ve got people like Oracle who are funding this expansion primarily through debt, debt that it now looks like they’re actually struggling.

going to sell, do we then see this sort of divergence between the two sides of that trade? I think that’s potentially an interesting one to keep a bit of a beady eye on next year.

Michael Hewson (23:35)
I think that was instructive in the reaction to Broadcom’s results on Friday last week, where they posted a bumper set of numbers. Guidance for the first quarter of next year was $19.1 billion, which was a 28 % increase on last year, 74 % increase in AIA semiconductor revenue, and the shares were down 12%.

Michael Brown (23:41)
Mm.

Hmm.

Yeah, and again, as you said, the numbers themselves were absolutely brilliant. I think this shows two things. One is that the market wants real clarity in terms of guidance, which it wasn’t really getting in terms of the quarter ahead. And the second is that when a stock is priced to perfection, any potential of blot on that copybook is punished really severely.

Michael Hewson (24:18)
I think you’ve also got to remember of what time of year it is. I think if you’ve got exposure in broadcom, the shares are at record highs, they posted a really strong set of guidance and you’re thinking, well, maybe I need to start paring down my book for year end. It doesn’t really matter what they deliver. You’re going to basically chop a good proportion of your portfolio down to lock in those profits. ⁓ I think it’s probably still a buy the dip candidate. The bigger question is, is how big that dip is going to be.

Michael Brown (24:26)
Mm.

Yeah.

Well, and the other question with that is do you buy the dip now or do you buy it in jam? And actually a lot of people do it in jam.

Michael Hewson (24:47)
Yeah, I think most.

Yeah, I think that’s probably sensible. Moving back to the FTSE 100, let’s look at the notable outperformers this year. Rolls Royce again contended strong gains from 2024. Babcock’s BAE Systems, although they’ve taken a little bit of a pairing back on this talk of potential ceasefire in Ukraine, but I certainly don’t think that’s happening anytime soon. I certainly don’t think it changes the narrative when it comes to

Michael Brown (25:07)
Yeah.

Michael Hewson (25:12)
you know, defense spending going forward. Order books are still chocked full. One of the comments actually on our podcast on YouTube the other day was about Kamring and the fact that those shares are starting to slip back. And I’ll address that directly. I still think Kamring is going to do some fairly decent business. I think the problem is that the share price was boosted by speculation about a bid from Bain.

Michael Brown (25:20)
Hmm.

Michael Hewson (25:35)
which has not materialised and ultimately I think the shares, while I think it’s still a decent investment, they’re trying to find their level after that bid speculation boosted them in the early part of this year. So there is scope for them to fall further in the short term, but that doesn’t necessarily mean that they will continue to decline. But again, it’s about the UK being an investment environment.

Michael Brown (25:35)
Yes.

No. ⁓

Yeah, and I fully agree with you on that. And I think we discussed that in some depth when we were talking about Kemmering’s earnings a few weeks ago. The other thing I would say is, you know, just going back to your broader point, yeah, we obviously all hope that there is a peace deal or a truce or some sort of sustainable end to the conflict in Ukraine. However, whether or not that materializes, we are now in an era of structurally higher defense spending. know, governments across Europe have had ultimately a wake up call of one, there’s a war on your doorstep.

to the US is not here to provide you with security guarantees, you need to step up and defend yourselves. Neither of those two factors immediately go away just because Ukraine and Russia sign a truce. This investment is going to continue to be made and those order books are going to continue to be filling up but also fulfilled at the other end of that. That’s not a prolonged bear case for the defense sector in my mind.

Michael Hewson (26:49)
And think it’s borne out by those numbers that Germany published this morning about how much debt they’re looking to issue in 2026. Was it 512 billion euros?

Michael Brown (26:58)
You are probably right because you usually are but let me double check you if you want to make a joke while I find the figure it was 512 billion well done. well there we go. It’s been such a long day you know it feels like a week ago that the BOE cut rates let alone looking at German debt issuance.

Michael Hewson (27:04)
It was your tweet, It was your tweet. That’s why I noticed it.

Yeah.

But it was your comment. You went, that’s a lot of debt or something along those lines. yes, punchy. That was it. And that’s what caught my eye. And those sorts of things stick when I see them.

Michael Brown (27:20)
Yeah, punchy.

Yeah.

But actually,

I mean, this is going off on a bit of a tangent, so we will not do this for long. But the amount of debt markets have got to absorb next year is huge. You know, we’ve got a record amount of issuance in Germany, as we just said. The DMO are going to sell three or four hundred billion in terms of guilds. know, treasuries, goodness only knows what the treasury are going to issue stateside, certainly if they have to start, you know, potentially issuing tariff refunds and paying for those somehow. Japan is going down the path of fiscal stimulus and looser policy.

Michael Hewson (27:56)
Hmm.

Michael Brown (27:57)
I mean, it’s not a particularly demanding economics assessment to go if a supply of an asset increases massively, which way does the price go? And which way does the yield go?

Michael Hewson (28:08)
Yeah, exactly. And I think that’s my concern about 2026. Could we have a sterling guilt crisis? Because at the end of the day, investors are going to be inundated with debt offers. And ultimately, unless you’re whiter than white when it comes to debt sustainability, where are you going to put your money? And if you’re not whiter than white, then investors are going to demand a higher premium. So Rachel Reeves, if you’re listening,

Michael Brown (28:26)
Yeah.

Yeah.

Michael Hewson (28:33)
You better make absolutely certain that your economic policies stand up to scrutiny in 2026 because if they don’t, then you could see a big sell-off in gilts.

Michael Brown (28:38)
Hmm, in trouble.

Especially when you’ve got corporate debt as well. know, I mean, it sounds unusual to compare them, but actually, you know, a lot of people would compare in terms of safety, you know, bonds of alphabet or Apple are probably on a par these days with those of DM governments in terms of default risk. You know, it’s minimal to zero. Yeah, exactly. So, you know, you…

Michael Hewson (28:57)
Hmm, I’d suggest more so.

because they’re run

by competent people.

Michael Brown (29:03)
Well, there is that, and they’re accountable to shareholders. But yeah, absolutely. think, you know, the point I would make is there will always be demand for guilt. There will always be demand for DM debt. It’s just a question of what yield does that demand want? And it could be a very, very high one, then fiscal doom loop. Let’s do another lap, shall we?

Michael Hewson (29:05)
Yes.

Well, where would

you put your money? In German debt, where the debt to GDP ratio is around about 60-70 % or the UK, where it’s nudging just north of 100. Yeah, exactly. And I think that’s my major concern. think if we get continued deterioration in the economic outlook and the UK Treasury or the Debt Management Office comes to market with billions of pounds of guilts…

Michael Brown (29:30)
Well, there’s only one answer and it’s not the UK, is it?

Michael Hewson (29:45)
who’s going to basically buy that debt when you’ve got all the other debt that’s washing around the system.

Michael Brown (29:50)
Yeah, I think that could be a real problem.

Michael Hewson (29:52)
So I think that’s one to watch. Anyway, I mean, getting back to the FTSE 100. Yeah, no, no, that’s fine. We’ll move it back slightly because obviously we’ve got the banks have led the way this year as well in our performance, which I’m sure our esteemed Labour MP will basically say, well, it’s because the UK economy is doing so well. No, it’s not. So Lloyd’s has led the way. Gains of over 75%. Followed by Standard Chartered Barclays.

Michael Brown (29:55)
Yeah, sorry, I’ve taken that miles off course.

Hmm.

No, it’s not.

Michael Hewson (30:19)
NatWest and HPC have lagged behind somewhat. I think it’s important to note that the likes of Lloyds and NatWest are well below their pre-financial crisis highs. Barclays probably getting back close to levels in 2009. And I would argue that the reason Lloyds is doing so well is because it’s done so poorly since the financial crisis. But now…

it’s leading the way, it’s got making more money than it’s ever made and ultimately I think given the fact they’re moving into personal wealth, wealth management with the acquisition of Schroders, I think there’s no reason why they can’t go through a pound.

Michael Brown (31:01)
No, and it does feel like we ask ourselves that question every year, you know, is this going to be the year they go for a pound? Well, maybe this one is, because as you say, they are probably in about as good a shape as they’ve been at any point in the last couple of decades, you could argue. No, I would agree.

Michael Hewson (31:12)
I don’t think there’s any reason why it shouldn’t.

know, UK economy notwithstanding, you know, they’re buying back their shares, they’re increasing the dividend. And as long as there aren’t any other legacy issues like the black horse finance, which appears to have had a line drawn under it, then there’s no reason to suppose that they won’t continue to perform well. The only caveat, obviously, is banking levy.

Michael Brown (31:27)
Yes.

Yeah, which there’s always a risk, isn’t there? But, you know, and certainly

Michael Hewson (31:38)
Yeah, there is.

Michael Brown (31:40)
We spoke about the budget, does it materially reduce the risk that Rachel Reeves is coming back again next year with a whole load of tax rises? No, it absolutely does not. Where are those tax rises going to fall? You’ve already done employer national insurance. You’ve now done the accounting fiddle of extending a threshold freeze. You’re running out of options as to taxes you can actually touch to raise significant amounts of revenue. So yeah, I think if the fiscal position does materially weaken even further,

Michael Hewson (31:54)
Yeah.

Michael Brown (32:08)
you are definitely looking at the potential for banks to find themselves in the firing line a bit there. ⁓ yeah, that’s a, you know, I guess you’d say it’s a tail risk that you wouldn’t include in a base case, but you’ve got to take account of.

Michael Hewson (32:13)
Yeah.

It’s there. mean the Bank

of England recently loosening its capital requirement thresholds is also likely to help it as well because they’ve cut them in light of the recent stress tests to 13 % from 14 % that’s tier one capital which means they can allocate more funds towards lending assuming there’s a demand for that.

Michael Brown (32:26)
Yeah.

But they won’t?

Well, exactly. And also the cynic in me, whenever you see bank capital lowered, know, yes, it’s going to, it’s going to boost lending. Well, actually it’s going to boost dividends and buybacks. But there we go.

Michael Hewson (32:49)
Well,

again, that’s a good reason to buy the shares. So, mean, this is essentially that’s what we’re doing this podcast for, right? Okay, so decent. It’s actually not been a bad year for retail, given the fact that obviously the cost of living has been weighing on consumer spending power, retail sales, retail. Next again, another solid year. Share price gains of over 40%.

Michael Brown (32:52)
⁓ absolutely, yeah.

Michael Hewson (33:18)
following on from a string of guidance upgrades. They are the exception, however, when compared to the rest of the sector. Not such a good year for Marks and Spencer’s, but we can easily explain that away, largely due to the cyber attack in April, which hit its revenues very, very hard. Yeah, exactly. And then you’ve got Tesco’s and Sainsbury’s, whose share price year to day are both up around about 20%. So I think we’ll get a good indication.

Michael Brown (33:33)
Well, they stopped online sales for a couple of months, didn’t they?

Mm-hmm.

Michael Hewson (33:45)
in the new year of despite the fact they’ve had a nine months, whether they’re going to have a fairly decent Q4 because these companies are all reporting their Christmas trading numbers in the first week of January. Next, Sainsbury’s, Tesco’s, Gregg’s and Marks and Spencer’s. So ladies and gentlemen, we’ve seen a good performance from most of them. Gregg’s not so much.

Michael Brown (33:58)
Yes.

Michael Hewson (34:08)
and Marks and Spencer’s not so much. I think the big test will be those Christmas numbers. What do they tell us? there have been a post-budget bounce back in December?

Michael Brown (34:21)
Well, I won’t hold my breath for one. Although having said that, obviously we get November’s retail sales numbers tomorrow, Friday morning for those of you listening to this, so we don’t have those right now. You’d expect some degree of a mechanical rebound simply because consumer spending has been so depressed in the run up to the budget. But those retail updates early next year are going to be absolutely pivotal for setting the tone as we start 2026. Did the consumer get this sort of second wind of optimism after the budget and go out and splash the cash in the

shops in the run-up to Christmas in the Boxing Day sales or were they much more reserved and actually you did see you know continued belt tightening continued pulling back in terms of consumption because if you did we know that January February March doesn’t tend to be a particularly great time for spending anyway you know you’re then looking at this five six month stretch of consumer spending being very very subdued the economy is already has not grown since the summer you’re then basically saying the economy won’t grow until the spring

Michael Hewson (35:16)
we’ve got November retail sales tomorrow so they will be I can’t imagine they’re going to be any they might be better than october’s but that’s a pretty low bar because they were minus 1.1 so November I’m expecting a negative number we got three months of negative numbers in 2024 for October November December given the mood music this year compared to last year it was even worse so I would be very surprised if we even

Michael Brown (35:25)
Mm.

Yeah.

Michael Hewson (35:42)
we’re in positive territory for November. I’d fall off my chair if I’m honest with you.

Michael Brown (35:44)
Yeah, I’d be incredibly surprised as well.

Well, please don’t do that. We’d quite like to keep you in one piece for the podcast next year, but yeah, I completely agree with the sentiment nonetheless.

Michael Hewson (35:53)
Indeed. Yeah.

So, looking at retail, Sainsbury’s and Tesco’s up over 15 % year to date. Marks and Spencer’s down 15%, but you have to set that decline in Marks and Spencer’s share price in the context of the two or three years before that when the share price has posted some really strong gains. So, we’ve just seen a modest pullback. And the pullbacks we’ve seen of

Michael Brown (36:15)
Yeah, I don’t think it’s anything to worry too much about.

Michael Hewson (36:21)
pretty much respected the same lows for pretty much all of this year. So they’ll be interested to see how it reacts around those lows going forward. But I can’t imagine that they’re going to have a worse year than the one they’ve just had.

Michael Brown (36:35)
Well, let’s not go tempting, Faye.

Michael Hewson (36:37)
No, but the point stands because obviously the cyber attack and they had to suspend sales and what have you for about three months. So I mean, that’s a significant impact. OK, so this year has also seen a lot of companies shun the UK as an investment destination. We’ve had AstraZeneca, Merck, Eli Lilly, Sanofi, Novartis, all cancelled or suspended projects in 2025, as has recently Getlink.

Michael Brown (36:44)
Yes, that is true.

Michael Hewson (37:06)
the channel tunnel operator who pulled their investment in the UK because of higher costs and higher taxes. Earlier this week there’s been talk that Rolls Royce might decide to move a big jet engine project to the US or Germany if it doesn’t get the financial banking it needs to help finance this particular project. Apparently this is going to cost about three billion pounds in R &D costs. And no one’s asking the UK government to pay that in the same way that AstraZeneca wasn’t asking it to pay

Michael Brown (37:08)
Hmm.

No.

Michael Hewson (37:33)
Any more than 450 million quid towards that project and speak but can we please please please Help UK companies invest in the UK and not penny pinch when we’re spaffing money left right and centre on foreign policy projects

Michael Brown (37:43)
Yeah.

Yeah. I mean, you’ve said it better than I could, I agree.

Michael Hewson (37:56)
So yeah, mean, Rolls Royce, we need to keep them here in the UK. They’re an industrial titan, manufacturing titan here in the UK. A success story. The new CEO’s done a brilliant job in basically boosting the share price. Not quite 100 billion pounds yet. Let’s get it there, shall we? Invest in the UK. Lower energy prices for manufacturers. Make the UK an investment destination of choice. And stop spaffing money on net zero projects.

Michael Brown (38:02)
and a real success story as well in recent years as well.

Hmm.

Yeah.

Michael Hewson (38:23)
Speaking of net zero projects, speaking of net zero projects and BP is the story of the day. I think regular listeners will know that I’m not a fan of the CEO of BP.

Michael Brown (38:24)
Right, now tell us what you really think.

Well, the outgoing CEO of BP. Yes, exactly.

Michael Hewson (38:39)
Outgoing CEO of BP. Yes,

I thought his position was untenable to be fair When Elliott took that stake and I thought to myself, you know He was one of the people the very people who took on the loony project Bernard loony. I mean it’s a loony project anyway, but yeah When he took off when he took on, know, this basically policy misguided net-zero renewables policy of cutting

Michael Brown (38:47)
Mm.

Yes. Well, yeah, rather unfortunately named, isn’t it?

Michael Hewson (39:06)
oil and gas production by 40 % by 2030. They’re getting a new CEO and she sounds just like what BP are going to need. She’s going to start 1st of April next year. She’s coming from Woodside Energy, Australia’s Woodside Energy. And from what I read about, and she used to work at Exxon. So first time that the BP have hired from outside, which suggests to me that

Michael Brown (39:11)
Yes.

Was it X on before that?

Michael Hewson (39:36)
Albert Manifold hasn’t basically, he’s hit the ground running, hasn’t he? He’s basically, he’s decided, he’s decided, right, okay, everything needs to change here. The mindset of the company needs to change. We need a new CEO who’s not wedded to BP, with a BP way of doing business over the course of the past 10 or 20 years. So.

Michael Brown (39:40)
what he has.

Yeah, and

I think for investors, it’s a really, really positive move because as you said, it’s

One, it’s an outsider coming in. So it’s a fresh perspective. It’s completely, well, you hope, new ideas, a new take on how to do things, not we’ve done it like this forever, so we’ll carry on doing it like that, et cetera, et cetera. Secondly, her CV is all in oil and gas, big focus on fossil fuels. That is BP’s bread and butter. That is what they need to be focused on. If you could have sort of designed someone or a background for the CEO job, this is probably the background you’d want.

if we’re being completely honest. obviously Wishur absolutely every success with it, but it is a really, really strong signal that they’re sending with this appointment that they understand not only Elliot, but the market’s concerns. And they are really trying to address that and put in place a plan to get back to what they do best.

Michael Hewson (40:48)
Yeah, I mean BP shares actually haven’t done that badly this year. I mean the oil price is down over 20 % here today. Shame we’re not seeing that reflected in our energy bills, but never mind. We all know why. But the shares, I mean they’re in positive territory just about, around about 5 % up on the year in line with ExxonMobil and Shell. But in reality they should be doing an awful lot better because if you benchmark that over five years they’ve really really lagged.

Michael Brown (40:58)
Well, yeah.

Yeah, absolutely and you know fingers crossed this gives them the kick that they are long overdue.

Michael Hewson (41:24)
The shares are down 1.3 % after actually pushing up on the day. But I think that’s a mechanical reaction on the back of the fact that the CEO is being replaced. the mechanical reaction is also the fact that she’s not starting till April, which means that any changes that she’s looking to make are going to take at least a year from now. yeah, yeah.

Michael Brown (41:44)
Well, yeah, you are talking about this time next year for anything to actually happen.

again, that might be a case of everyone saw the headline and then went, hang on a minute, it’s not happening for four months. But yeah, I wouldn’t read too much into it.

Michael Hewson (41:53)
⁓ Yeah.

But what

I would say is that I think once she gets her feet under the table, we may not be seeing the ending of senior management departures at BP.

Michael Brown (42:04)
No, I think it would be very surprising if she walked in and kept all of the exec team exactly the same as it is right now. In fact, I don’t think there’s any chance of that happening.

Michael Hewson (42:14)
I think it’s

between Slim and Nana. think Slim’s just left the building.

Michael Brown (42:17)
Yeah, I

think you’re probably right on that one mate.

Michael Hewson (42:20)
All right, well, I think that’s pretty much it for this week and this year, Michael.

Michael Brown (42:25)
Indeed, yeah, it’s been a

bit of a wild ride over the last 12 months, mate, but it’s been good fun nonetheless working through it with you. Thank you to all our listeners, of course, for sticking with us over the last 12 months or so. yeah, have a very Merry Christmas. Have a good one to you as well, mate. And we’ll be back in 2026, I guess.

Michael Hewson (42:31)
It has.

Indeed.

we’ll pick this up in the new year where hopefully we’ll be looking at the latest numbers from next Sainsbury’s, Tesco’s, Gregg’s and Marks and Spencer’s and maybe talk a little bit about non-farm payrolls. yeah, so predictions.

Michael Brown (42:56)
and maybe

Santa will have brought you a better outfit as well.

Michael Hewson (43:00)
Well, see this one is I recycle every year. this will now go into this one to go into the drawer for 12 months for the next one. And that gives you plenty of time to buy a Christmas jumper of your own. You basically miserable git. I think I could probably afford that. All right. Well, as I say, thanks. Thanks very much for your company this year’s ladies and gentlemen. And Michael and I will both speak to you again.

Michael Brown (43:04)
Into storage.

Yeah, you might have to buy one for me. Anyway.

Michael Hewson (43:25)
in the new year. Have a great Christmas and an even more prosperous 2026.

Michael Brown (43:30)
in date.