FTSE 100 leaps investors' predictions
After closing at a 10-month high yesterday (30 June) at 6,504.30 points, the FTSE 100 index of the largest companies listed on the London Stock Exchange has continued its rally. At the time of writing this morning (1 July) it was sitting at 6,532.19
There are a multitude of factors for this sharp – and, it has to be said, unexpected rise - one of which being Mark Carney, the governor of the Bank of England (BoE), who gave a confident and measured speech on late Thursday afternoon, just before the markets closed.
Mr Carney suggested that “some monetary policy easing” would be required in the face of deteriorating economic outlook and warned of a “material slowing” in growth. This is a big hint at further bouts of quantitative easing (QE), whereby the BoE buys great numbers of government bonds with ‘new’ money in order to introduce additional funds into the economy, which is done with the aim of encouraging lending to people and businesses.
Mr Carney also hinted an interest rate cut was on the cards, which, essentially, would make for cheap borrowing.
He finished his speech by saying that, “The question is not whether the UK will adjust but rather how quickly and how well.”
Another factor has been the continued weakening of the pound against the US dollar, which helps companies that export from the UK.
Where could the FTSE 100 index go from here?
David Jeal, head of investment products at stockbroker Interactive Investor says: “With the pound slipping further against the dollar, the outlook for the globally-focused large cap index is positive; at least until the impact of Brexit starts to become clearer. Despite the firm announcements from this week's Euro summit, that's probably many months away.”
But the UK stock market is divided between the large blue-chip companies that have revenues overseas and medium-sized companies, represented by the FTSE 250 index, which have a domestic focus.
Mr Jeal says: “The UK-focused 250 still struggles to make much headway, languishing some 1,000 points lower than last week's Brexit sell off. Boosting their exports in such times of uncertainty may be harder and the latest consumer confidence research will give little comfort with signs that discretionary spending will be cut as imported inflation pushes up costs.”
Laith Khalaf, senior analyst at Hargreaves Lansdown says:
‘The last few days have seen a tale of two stock markets playing out on the UK’s trading floors. The share prices of big companies with international revenues have prospered, while those exposed to the UK economy have been severely marked down.
“However, in the last two days these domestic stocks have bounced significantly. It’s quite remarkable how quickly sentiment can move the price of stocks up and down without so much of a hint of company news. This once again serves to highlight why investors should tune out the short term fluctuations of the stock market, because they often defy rhyme and reason.”
Where should you be investing?
Jason Hollands, managing director at Tilney Bestinvest says the high yield (the income return received via dividends) from companies in the FTSE 100 index should underpin its performance.
He explains: “These companies typically earn the majority of their revenues outside of the UK, so the weakness in the Pound should be supportive to these companies as they translate Dollar earnings into Sterling profits and dividends.
“We therefore think it is sensible to focus more on this end of the market, through well managed funds focused on large, liquid high quality funds such as Evenlode Income and JO Hambro UK Opportunities.
“There will of course be selective opportunities in mid-sized and smaller companies that have been indiscriminately sold off, but we remain cautious on domestic cyclicals. A fund that provides exposure to large, mid-sized and smaller growth companies, with resilient business models is Liontrust Special Situations, which has historically performed well in down markets.”
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The term is interchangeable with stock exchange, and is a market that deals in securities where market forces determine the price of securities traded. Stockmarket can refer to a specific exchange in a specific country (such as the London Stock Exchange) or the combined global stockmarkets as a single entity. The first stockmarket was established in Amsterdam in 1602 and the first British stock exchange was founded in 1698.
The general term for the rate of income from an investment expressed as an annual percentage and based on its current market value. For example, if a corporate bond or gilt originally sold at £100 par value with a coupon of 10% is bought for £100 then the coupon and the yield are the same at 10%, or £10. But if an investor buys the bond for £125, its coupon is still 10% (or £10) and the investor receives £10 but as the investor bought the bond for £125 (not £100) the yield on the investment is 8%.
Lower interest rates encourage people to spend, not save. But when interest rates can go no lower and there is a sharp drop in consumer and business spending, a central bank’s only option to stimulate demand is to pump money into the economy directly. This is quantitative easing. The Bank of England purchases assets (usually government bonds, or gilts) from private sector businesses such as insurance companies, banks and pension funds financed by new money the Bank creates electronically (it doesn’t physically print the banknotes). The sellers use the money to switch into other assets, such as shares or corporate bonds or else use it to lend to consumers and businesses, which pushes up demand and stimulates the economy.
An increase in the general level of prices that persists over a period of time. The inflation rate is a measure of the average change over a period, usually 12 months. If inflation is up 4%, this means the price of products and services is 4% higher than a year earlier, requiring we spend and extra 4% to buy the same things we bought 12 months ago and that any savings and investments must generate 4% (after any taxes) to keep pace with inflation. Since 2003, the Bank of England has used the consumer prices index (CPI) as its official measure of inflation (see also retail prices index).
A market-weighted index of the 100 biggest companies by market capitalisation listed on the London Stock Exchange. It is often referred to as “The Footsie”. The index began on 3 January 1984 with a base level of 1000; the highest value reached to date is 6950.6, on 30 December 1999. The index is “weighted” by how the movements of each of the 100 constituents affect the index, so larger companies make more of a difference to the index than smaller ones. To ensure it is a true and accurate representation of the most highly capitalised companies in the UK, just like football’s Premier League, every three months the FTSE 100 “relegates” the bottom three companies in the 100 whose market capitalisation has fallen and “promotes” to the index the three companies whose market capitalisation has grown sufficiently to warrant inclusion. Around 80% of the companies listed on the London Stock Exchange are included in the FTSE 100.