WHY HAS THE FTSE ACHIEVED NEW RECORD HIGHS THIS YEAR?
INVESTMENT EXPERTS SAY a weaker pound and a surging oil price have played a big part in the recent stock market rally, among other factors.
Around two-thirds of the FTSE 100 index’s earnings come from overseas, so the lower the pound goes, the more those foreign earnings are worth when they are translated into sterling.
‘This explains why the FTSE 100 did so well in 2016 and early 2017, as the pound fell in the aftermath of the EU referendum vote,’ says Russ Mould, AJ Bell investment director.
The Bank of England’s failure to tighten monetary policy earlier in May by keeping interest rates wedged at 0.5% has clearly given the FTSE 100 another push. Sterling has also been weak recently amid disappointing UK economic data.
Brent Crude’s rough 75% rally since June last year is another big plus for the UK’s blue-chip index. Sector heavyweights BP (BP.) and Royal Dutch
Shell (RDSB) are the second and third largest ranked companies in the FTSE 100, by market value, and between them represent 25% of total FTSE 100 sales, 14% of profits and 20% of dividends for 2018, according to consensus analyst forecasts.
It is easy to forget that the FTSE 100 had a very poor start to the year, leaving the UK market at its ‘largest price to book discount to the S&P 500 in at least 18 years,’ according to Charles Montanaro, manager of the Montanaro UK Income Fund (IE00BYSRYZ31).
This presumably helps explain the rampant run of mergers and acquisitions targeting UK businesses recently. FTSE 100 members Shire
(SHP), Sky (SKY) and Smur t Kappa (SKG) have all been on the receiving end of takeover interest this year.
Patrick Thomas, investment manager, Canaccord Genuity Wealth Management, believes the ‘mood music’ is changing. ‘What we saw in that first quarter was we saw more money going into equities than we’d ever seen, and with the tax cuts in the US and the share buybacks, there was an added ferocity to that inflow.
‘But for all of that, the markets ended the quarter on a weak note, and as we’ve seen, this was despite the fact that US profits rose by some 15% year-on-year, almost the strongest sequential numbers ever.’
Stock markets in many parts of the world have enjoyed a strong recovery so far in the second quarter of the year. However, on a broad basis, the FTSE 100 has lagged global peers in terms of performance, says Martin Newson, chief executive officer at Optimus Capital.
‘As we get closer to the UK leaving the European Union, we think there is scope for the FTSE 100 to outperform UK smaller companies, which are usually more sensitive to the domestic environment.’
Not everyone is bullish on the market outlook. For example, Peter Garnry, head of equity strategy at Saxo Bank, believes the recent market drivers will lose their thrust over the coming months. He is negative on UK equities on a short-term view.
Inflation remains a key threat to further stock market gains. It could lead to higher interest rates, reducing consumer spending power while upping corporate operating costs.
‘The jump in the oil price has started to hit petrol pumps, pushing up costs for UK consumers and businesses alike, which will ultimately filter through to UK consumers in the coming months,’ cautions AJ Bell’s Russ Mould.
April’s 2.4% rise in the CPI measure of UK inflation was softer than the 2.5% expected but the rising cost of living pace could easily ‘pick up in the next couple of months,’ believes Andrew Sentance, senior economic adviser at PwC.
‘The general direction [of interest rates] remains upwards, given negative real interest rates; it is more a question of timing,’ says the UK equity team at OLIM Investment Managers.