T
he UK stock market hit fresh highs this week, sparking speculation as to whether it could reach the 8,000 marker before the end of the year.
The FTSE 100 had a shaky start to the year amid a number of geopolitical concerns, worries around Brexit negotiations and nervousness around interest rate hikes.
The market bottomed out in March at 6,889 as talks of a trade war between the US and China ramped up and the possibility of a second UK interest rate rise looked more likely.
But, just two months later, the market has gained almost 15% to reach a new high of 7,897 and optimistic experts are forecasting it could continue to set new record highs in the coming weeks.
Jordan Hiscott, chief trader at ayondo markets, thinks the stock market will reach 8,000 before the end of the summer.
He says the performance of the UK stock market is all the more impressive considering the difficult backdrop at the moment, with Brexit negotiations not progressing as quickly as many would like and economic growth lower than many other major markets.
Hiscott says: “The composition of the FTSE is key – the largest components in the market make a large amount of their revenue from operations outside the UK, meaning that a weaker sterling aids profit. This, for me, is the key driver of the latest move higher in the FTSE.
“Going forward, the upward momentum and weaker currency is likely to continue and I wouldn’t be surprised if it reached 8000 before the end of the summer.”
FTSE Firms on Low Valuations
There are plenty of reasons the upward surge could continue. The UK has been out of favour among investors for some time now, which means many of its constituents are trading on relatively low valuations.
One effect of this is that the dividend yields these firms are producing look far more attractive. Indeed, the index itself is yielding more than 4%. Total dividend payouts this year are expected to reach £88.3bn – some 7% more than last year and almost double the amount shareholders received in 2010. This makes the FTSE an appealing place for income-seekers to stash their cash.
Russ Mould, investment director at AJ Bell, says: “If the Footsie can get to 8000 and stay there, that would be a capital gain of 4% for the year with a 4% dividend yield on top – miles better than cash or bond yields and nicely ahead of inflation. I suspect a lot of people would have been happy with that had it been offered to them at the start of the year.”
Some two-thirds of earnings in the FTSE 100 come from overseas so the lower the pound goes the more those profits are worth in sterling terms.
Will Hobbs, head of investment strategy at Barclays, points out that the recent rise in the oil price has been a further boost, with commodities companies making up a significant proportion of the index. Oil is estimated to account for around 14% of FTSE 100 profits, and 25% of sales.
But he adds: “There are, nonetheless, some offsetting factors that help relegate the FTSE down our pecking order of favourite equity indices.” Heavy exposure to defensive sectors such as consumer staples, utilities and pharmaceuticals may be a drag on performance, for example, as cyclicals rotate back into favour. He adds: “We see greater short-term upside in the stock markets of the US, Continental Europe and Emerging Asia.”
Threats to the stock market’s winning streak including rate rises, which could boost the pound and therefore hit firms’ overseas earnings as well as driving bond yields higher, which could see income investors turn away from equities and back to fixed income. A reversion in the oil price, meanwhile, could hit commodity company profits and threaten their dividends.
The UK stock market may currently be defying expectations, but Mould thinks investors should not get carried away. He says: “The time to buy an investment is when no-one’s interested, so the fact the FTSE 100 is now seen as hot property should at least give investors pause for thought.”
