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.

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