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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