Never miss an issue of Master Investor Magazine – sign-up now for free! |
After almost a decade-long bull market, it may seem strange to be considering the recovery potential of two FTSE 100 stocks. The index has more than doubled since reaching the nadir of its bear market in March 2009, and many of its incumbents have delivered strong capital growth since then.
In the last year, though, the index has faltered. It is currently down over 100 points in that time, with the potential for a full-scale global trade war possibly weighing on its performance.
Some of its members, though, have performed far worse than the index in recent months. Two examples are WPP (LON:WPP) and Royal Mail (LON:RMG). The former is down 18% in the last year, while Royal Mail has dropped 19% in the last six months. Could successful turnarounds be ahead for the two stocks?
Uncertain prospects
The global economic growth outlook could be damaged by the tariffs that have been announced by the US, China and various other countries in recent months. They have the potential to cause a slowdown in GDP growth, as well as create fear and uncertainty among businesses and investors over the medium term. According to the IMF, if the tariffs announced recently are fully implemented, they could reduce global GDP growth by as much as 0.5% by 2020.
Growth potential
Of course, the forecasts for the global economy remain relatively robust. The US economy, for instance, grew at an annualised rate of 4.2% in the second quarter and is expected to post 3.5% annualised growth in the third quarter. Beyond that, annual growth of 2.5%+ is forecast through 2018 and 2019. China’s GDP growth rate is expected to be 6.5%+ in 2019, while the eurozone GDP growth rate is due to be 2.2%+ per annum over the next two years.
As a result, the impact of tariffs may not be as significant as initially feared. Although further tariffs could change economic forecasts, at the moment the outlook for the world economy seems to be positive.
Investment potential
With WPP already being an internationally-focused business, and Royal Mail becoming increasingly less reliant on the UK as a result of the growth of its international operations, a fast-growing world economy could catalyse the financial performance of the two stocks.
WPP is currently engaged in a transitional period. It recently appointed a permanent CEO and is in the process of conducting a strategic review. It is likely to continue to make further asset disposals as it seeks to focus on generating efficiencies and maximising the performance of its core operations. After a long period of near-constant acquisitions, a refocus on its more profitable areas could help to lift its financial and share price performance.
Royal Mail’s international division, GLS, continues to engage in M&A activity. This is gradually shifting the group’s focus to the global economy, rather than being a UK-dominated stock. GLS accounted for 33% of the group’s adjusted operating profit in the 2018 financial year. This figure is likely to increase as the segment offers significantly higher growth potential than its UK operations, which have experienced a mixed performance of late. With a new CEO likely to ramp-up investment in its international operations, the prospects for the stock could be positive in a fast-growing world economy.