Experts say investors should temper their expectations after the FTSE 100 reached a record closing high.
The FTSE 100, which measures the performance of the top 100 biggest companies listed on the London Stock Exchange, reached a record closing high of 7,556.24 on Thursday. Gainers on the day included export companies such as Burberry (up 2.65%) and Unilever (up 2.07%).
The upward surge was largely thanks to a perceived impasse in Brexit talks which caused the pound to slide, losing nearly one cent of its value against the dollar. Many companies that make up the FTSE 100 index are companies that export and earn in foreign currencies, making them more attractive to investors when the pound weakens.
‘FTSE 100 could reach 7,600 if Brexit talks go badly’
Lee Wild, head of equity strategy at Interactive Investor (Moneywise’s parent company) says: “There have been a number of key drivers behind the FTSE 100’s latest rally, among them a weaker pound, likely increase in UK interest rates, government housing policy and a lack of any viable alternatives for investors.
“There’s an inverse relationship between sterling and the FTSE 100. A weak currency is great news for the FTSE 100’s army of overseas earners who receive a windfall when expensive dollars are converted back into sterling.”
“A more hawkish Bank of England has been good for banks, which typically generate higher margins when interest rates rise. The government’s promise to extend the Help to Buy scheme is also a massive boost to UK housebuilders Barratt Developments, Persimmon and Taylor Wimpey.
“While it’s true there are fewer bargains around, investors can still find plenty of companies trading on reasonable valuation multiples paying a generous and affordable dividend. And it’s much harder to find the level of returns on offer from equities in other liquid investments.
“This should underpin confidence in the stock market and possibly steer the FTSE 100 to an all-time high at 7,600, especially if Brexit talks go badly or a threat to Theresa May’s leadership puts pressure on sterling.”
The shock appears to have inverted on Friday morning however, as sterling recovered its value after the close of the markets in the UK. The index has started down on Friday (0.36% at the time of writing) thanks to weak profit data from engineering firm GKN. To compound this the pound has now sailed to a two-week high on the news that the EU is preparing to negotiate a trade deal, despite “deadlock” on the so-called divorce bill.
LCG senior market analyst Ipek Ozkardeskaya comments: "UK stocks began the session downbeat. The correction could deepen into the weekly closing bell as Brexit uncertainties loom before [the] October 19/20 summit in Brussels, while the pound is subject to upside pressures.”
‘The immediate direction of the stock market is of limited importance’
Fluctuations in sterling and the continued success of the FTSE 100 index recording recent highs is however perhaps not a true reflection of the UK economy. Political uncertainty; flip-flopping of attitudes and positions seem a daily occurrence currently, sending shivers down the spine of the pound at regular intervals. But as can be seen from the recent fluctuations, these bouts of nervousness can prove temporary. For more on these issues read our Fund briefing on UK equities.
As a result, Thursday’s record high close has come with significant caveats from investment experts. Laith Khalaf senior analyst at Hargreaves Lansdown says: “It’s vital to recognise that the level of the FTSE is not a measure of the value in UK stocks, seeing as it doesn’t take account of the level of earnings of companies in the index. Basing investment decisions on the level of the FTSE is therefore like deciding whether to buy something based on its price, without actually knowing what the item is.”
Mr Khalaf adds: “There are some reasons to be positive. The global economy, driven by its largest contributor the US, is picking up, with even Europe seeing a renaissance. Interest rates remain low and the UK consumer remains resilient. Meanwhile, in an environment where doom and gloom pervades market sentiment, any positive surprises could go a long way to boosting stock prices.
“For long term investors the immediate direction of the stock market is of limited importance in any case, as what ultimately determines your wealth are the scores on the doors when you come to draw on your investment. History tells us that over a long time period, the stock market really comes into its own.”
Hargreaves Lansdown calculate that a £10,000 investment in the FTSE All-Share index in 1987 would have been reduced to £6,610 in a matter of weeks. However, if investors had waited 5 years, their investment would have fully recovered, and 10 years later would be worth £32,690, with dividends reinvested. Today that investment would be worth £104,340.