Cheap UK stocks hit new highs
The FTSE 100 closed above 8,000 points for the first time on Thursday 16 March. The index of British bluechips hit its first record high in more than four years at the start of this month and has continued to rally since. The 8,000-point level is symbolic – it simply tracks progress since the index was launched in 1984, at a starting level of 1,000 points – but will be seen as an important psychological level.
The FTSE 100’s strength at a time of faltering UK growth leads to much confusion, says Graeme Wearden in The Guardian. The index is dominated by multinationals, with FTSE 100 firms deriving roughly 75% of their revenue from overseas. The rally thus reflects an improved outlook for the global economy.
Closer to home, investors have also been cheered by signs of cooling UK inflation. Traders now expect the Bank of England to stop raising interest rates this summer, with rates peaking below 4.5%. That is a significant improvement since the “turmoil” of last autumn’s mini-budget, when rates were expected to hit 6%. Easier money usually finds its way into markets, giving shares a boost.
The dividend advantage
“In recent years, many investors have dismissed UK bluechip shares as ‘boring’, lacking exposure to exciting sectors such as technology and social media,” Jason Hollands of investment platform BestInvest tells CNBC. Yet “in a more trying economic environment, solid companies churning out reliable dividends” suddenly look appealing.
British shares “still remain largely unloved despite outperforming other global markets [in 2022]”, says Angharad Carrick for This is Money. Investors pulled over $800m from UK-focused funds last month. Yet on 10.5 times forecast earnings, the FTSE 100 is trading on a steep 33% valuation discount to the global stockmarket average. Dividend yields of roughly 4% are also much more appealing than the 3.2% average yield in emerging markets or the 1.6% on offer from US stocks.
This discount is an opportunity for investors, but it is a problem for UK capital markets, say Jill Treanor and Jamie Nimmo in The Sunday Times. Cheaper capital overseas is prompting some UK firms – especially in the tech and biotech sectors – to seek listings in the US. That risks driving talent abroad and ultimately eroding London’s position as a financial centre.
The FTSE 100’s latest rally may yet come unstuck amid the cost-of-living squeeze, a “stalling” commodities rally and a recovery in the pound (which erodes the sterling value of overseas earnings), say Joe Easton and Sagarika Jaisinghani on Bloomberg. The index has underperformed global peers so far this year.
However, that’s because tech stocks have been rallying and commodities lagging of late, says Russ Mould of investment platform AJ Bell. Investors are betting that the high inflation and high interest-rate environment of 2022 was an “aberration rather than the new normal”. Yet should inflation prove sticky, then the sort of “real” assets and reliable cash streams offered by London’s oil firms, miners and banks will soon be back in fashion.