The FTSE 100 has already reached new record highs in the first few weeks of 2025, driven by a range of factors including a stronger dollar, ongoing M&A interest and ongoing strength in the banking sector.
On Jan. 17, the index of London’s biggest companies closed at a record high, beaten again on Jan. 20, when the FTSE 100 closed above 8,500 points, beating levels last seen in May 2024, ahead of the election of the new Labour government. The Morningstar UK Index is up nearly 4% this year, while the FTSE 100 is more than 3% higher in the year to date.
Some fund managers backing UK equities argue that this shows that the domestic market benefiting from changing perceptions about the country under a new government. On a valuation basis, with US markets at high levels, investors have also been enticed by cheaper stocks. On the other hand, the UK government is under pressure over its tax and spending plans, as the recent bond market turmoil shows. There are concerns about sticky inflation, despite recent positive data, as well as ongoing problems with weak economic growth. So the recent gains have been connected more to external factors rather than a “vote of confidence” in the government’s first six months in power, or a sign that the UK economy is roaring ahead.
Pound Has Weakened Against the Dollar
Many UK large-cap companies are benefiting from a weak pound because they earn a significant amount of their revenues and profits in dollars. This has traditionally boosted FTSE 100 stocks more than the more domestically focused FTSE 250 because more of the largest companies are dollar earners.
The dollar strengthened after Donald Trump’s election victory and the pound has weakened because of domestic economic issues. In September last year a pound bought USD 1.34, but that exchange rate has fallen to USD 1.22.
BP and Shell Riding the Oil Price Boom
London-listed oil companies are often among the beneficiaries of a stronger dollar because of their overseas earnings. A rise in the oil price has also helped.
So far this year, Shell’s SHEL share price is up 7.61% and over that same period, BP’s BP. share price has increased by 6.72%.
Brent crude oil is currently trading at nearly $80 per barrel, from around $74 at the start of the year.
Andrew Raikes, portfolio manager of the TT UK Equity Fund, which has a Morningstar Medalist Rating of Gold, notes that there has been a change in market dynamics recently.
“The main catalyst for that has been around what the outgoing Biden administration was enforcing, a much more draconian implementation of sanctions on Russian cargoes that potentially takes quite a bit of supply out of the market,” he says.
“So that’s led to the oil price tightening and against a backdrop where both the oil price and the oil stocks were pretty weak through the second half of last year, we have seen quite a sharp pick up in that sector.”
The UK energy giants may also benefit from the incoming Trump administration’s pro-energy stance.
M&A, Dollar Boost Mining Too
Another US dollar earner is the UK-listed mining sector, which is also benefiting from improved investor sentiment towards China, driven by a surge in manufacturing as well as signs of recovery in China’s property sector. Last week the rumor mill swirled that mining giants Rio Tinto RIO and Glencore GLEN were in talks for a proposed £129.96 billion merger.
Glencore is one of the best-performing stocks in the FTSE 100 this year, rising nearly 10%.
Tineke Frikee, portfolio manager of the Waverton UK Fund, which has a Morningstar Medalist Rating of Bronze, says a revival of the Anglo American/BHP deal, which went cold last year, could be on the cards too.
“If we get a lot of M&A activity it typically lifts prices and that will be helpful for the UK equity market,” says Frikee.
Andrew Raikes notes rises in copper and iron ore prices and also believes that investors are becoming less fearful about the impact of Trump’s tariffs.
“The rhetoric is being dialed back slightly from going in with very significant tariffs on day one to a more measured approach.”
Banking Stocks Off to a Strong Start
UK banking stocks had a strong 2024 as interest rates remained high by historical standards, supporting net interest margins.
Kathleen Brooks, research director at XTB, says that regulatory changes could help UK valuations this year, especially with delays to the implementation of Basel III rules.
“UK banks are now aligning more closely with US regulation, compared to European banks. That leaves the financial sector in a really good position because they are seen as riding the coattails of the US with its deregulation bounce to markets.”
Banks ranging from NatWest NWG, which was the top-performing UK stock in 2024, to Barclays BARC, HSBC HSBA, and Standard Chartered STAN are all set to benefit, she argues.
Waverton’s Tineke Frikee says that banks have been slow to improve their profitability in recent years but there are signs of revival in key financial metrics.
“Finally, we are starting to see some green shoots ... Some of them are not there yet, and it’s very slow. But if they can do that, we could see a really big change in their valuations,” she adds.
The author or authors do not own shares in any securities mentioned in this article. Find out about Morningstar's editorial policies.
