The driv­ers be­hind the FTSE 100’s record highs

The Daily Telegraph - Your Money - - YOUR MONEY - Laura Suter

Bri­tain’s blue-chip index may have started the year by reach­ing a record high but its gains have been fu­elled by a boom in com­mod­ity prices and the fall in ster­ling. So are they sus­tain­able in 2017?

While many in­vestors will see the record lev­els as rea­son to re­joice, when we ex­am­ine the causes of the surge the pic­ture is less rosy.

The fall in ster­ling is par­tic­u­larly sig­nif­i­cant: around 70pc of FTSE 100 firms’ earn­ings are made over­seas and any fall in the pound makes them more valu­able in ster­ling terms.

Dur­ing 2016 the FTSE 100 rose by more than 19pc. How­ever, in US dol­lar terms – strip­ping out the pos­i­tive im­pact of ster­ling’s fall – the index ac­tu­ally fell, by 0.2pc.

The rise of the index in 2016 also hides the enor­mous di­ver­gence within it. Look­ing at the index sec­tor by sec­tor shows that there were some large ris­ers and some steady fall­ers.

Oil and gas pro­duc­ers rose by 50pc last year, while the FTSE 350 min­ing index rose by 100pc, ac­cord­ing to data from JP Mor­gan As­set Man­age­ment. On the other hand, re­tail­ers fell by nearly 14pc, while the tele­coms sec­tor was down by 21pc and food pro­duc­ers lost 9pc.

Ja­son Hol­lands from Til­ney Bestin­vest, the fund shop, said: “Cur­rency moves res­cued mar­kets for UK in­vestors last year. If you were cau­tious a year ago, with con­cerns about the un­cer­tain geopo­lit­i­cal out­look, then this year has sim­i­lar warn­ings.” He pointed to a “marathon” of Euro­pean elec­tions and the po­ten­tial un­pre­dictabil­ity of Don­ald Trump’s pres­i­dency.

Chris Wyl­lie, chief in­vest­ment of­fi­cer at Con­nor Broadley, the wealth man­age­ment firm, said he did not have con­cerns about the val­u­a­tions of Bri­tish com­pa­nies but ad­vised in­vestors to be dis­cern­ing and to “buy the dips”.

“There are go­ing to be some blood­bath sec­tors for medi­um­sized firms, re­tail be­ing one. More busi­nesses will be go­ing to the wall,” he said.

Mr Wyl­lie pointed to the ex­am­ple of Next, which this week is­sued a profit warn­ing after slower Christ­mas sales, and said: “If Next is feel­ing it, what are the less good busi­nesses out there go­ing to be do­ing?”

There are two big ques­tion marks hang­ing over Bri­tain in 2017, said Tom Steven­son from Fidelity, the as­set man­ager. The first is do­mes­tic earn­ings. “Eco­nomic growth in the UK is prob­a­bly go­ing to slow down sig­nif­i­cantly be­cause in­fla­tion is likely to rise and that means real con­sumer pur­chas­ing power is go­ing to di­min­ish,” he said.

The other big risk to Bri­tish shares is Brexit and the as­so­ci­ated un­cer­tainty. Mike Bell of JP Mor­gan said the fall in ster­ling had priced in a “hard Brexit” that might not ma­te­ri­alise.

“If so, ster­ling will rally and that could re­verse some of the gains that we have seen as a re­sult of its fall,” he said.

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