The FTSE 100 has hit a second all-time closing excessive in as many days.
The index of the UK’s greatest 100 listed firms, having earlier hit a brand new intra-day excessive of 8,075.52 at simply after 8.24am on Tuesday, completed the session up 20.94 factors, round 0.26%, at 8044.81.
It is value reflecting it has taken simply over a yr for the premier index to recapture the summit final achieved when, on 16 February 2023, the FTSE hit the dizzying heights of 8,047.06.
A good bit has occurred since then.
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When the FTSE final peaked, earlier than this week, the Financial institution of England’s foremost coverage price – Financial institution Charge – stood at 4%, with the financial coverage committee happening to lift it an extra 3 times, taking it to the current 5.25% in August final yr.
By then, the UK financial system had already entered a recession, albeit a really shallow one from which it has, most likely, now emerged.
Shortly after the FTSE hit its peak in February final yr, it surrendered the 8,000 milestone pretty quickly, slumping to as little as 7,206.82 on 20 March final yr as markets shuddered following the rescue of Swiss banking big Credit score Suisse.
It then meandered alongside for a lot of the remainder of the summer season, revisiting these troughs, as concern mounted that central banks world wide would proceed to lift rates of interest within the face of rising inflation.
As we now know, rates of interest had peaked by the autumn, with the US Federal Reserve’s final hike coming in July final yr, the Financial institution of England’s in August and the European Central Financial institution’s in September. The ultimate quarter of final yr noticed fairness markets in every single place, together with the FTSE, rally as traders started to cost in interest-rate cuts throughout 2024.
It is value noting, although, the FTSE has been a relative laggard this yr.
US and plenty of different European inventory markets have loved a stronger restoration over the previous yr. Pic: Reuters
The S&P 500, America’s prime inventory index, is up 6.91% to this point in 2024, Japan’s Nikkei 225 is up 12.81% and Germany’s DAX 40 is up by 8.30%. The FTSE, in contrast, is up by a mere 4.05% even after the rally of latest periods.
So it may well hardly be stated to be doing effectively in contrast with its worldwide friends.
On prime of these already talked about, the MIB in Italy is up by 13.24% this yr and the CAC 40 in France by 7.46%, for instance.
Nonetheless, the FTSE hitting a brand new document shut two days operating is notable.
There isn’t a scarcity of the explanation why.
The obvious is the latest weak point in sterling. The pound hit a five-month low in opposition to a world basket of currencies on Monday following feedback from Sir Dave Ramsden, a deputy governor of the Financial institution of England, on Friday afternoon, wherein he pointed to the rising probability of interest-rate cuts within the close to future.
That has weakened the pound in opposition to the US greenback particularly. Since three-quarters of earnings of FTSE 100 firms are denominated in different currencies, mainly the US greenback, a fall within the pound in opposition to these currencies makes the long run earnings generated by FTSE firms – whose shares are denominated in sterling – cheaper to purchase in these currencies.
That was definitely behind the large rally seen on Monday – though at present sterling rallied on feedback from Huw Tablet, the Financial institution’s chief economist, which suggests there may be extra happening.
That one thing is the relative cheapness of the FTSE compared with its friends. The FTSE at the moment trades on a value/earnings (P/E) ratio of simply 13.22 instances – in different phrases, £1 invested within the index at present could be repaid 13.22 years from now. That’s low-cost when set in opposition to the DAX in Germany, which trades on a P/E of 14.87 instances and the CAC in France, which trades on a P/E of 15.91 instances or the SMI in Switzerland, which is on 14.52 instances.
The primary US indices, in the meantime, cavort alongside on P/E ratios of greater than 20 instances. Solely Spain’s main inventory index, the IBEX, seems to be cheaper than the FTSE by comparability.
The conclusion that ought to emphatically not be drawn is that the FTSE’s latest rally is something to do with the UK’s financial outlook, regardless that the latter is visibly bettering.
The index is chock-full of firms which have little or nothing to do with the UK – akin to Fresnillo, a Mexican gold and silver miner; Antofagasta, a Chilean copper and gold miner and Ashtead Group, a plant and power rent firm which derives £90 in each £100 it earns from the USA.
Even firms regarded as British, akin to BP, Rolls-Royce, BAE Techniques, Shell and Diageo, the world’s greatest scotch whisky and tequila producer, derive the overwhelming majority of their earnings outdoors the UK. In reality, of the 20 greatest firms within the FTSE, just one – the Lloyds Banking Group – will be stated to make most of its earnings within the UK.
For a greater gauge of how company Britain is doing, traders are higher off trying on the FTSE 250, the subsequent greatest 250 listed firms on the London Inventory Change and residential to family names akin to Bellway, Video games Workshop and ITV.
A few of these additionally derive a good chunk of earnings from outdoors the UK, such because the cruise operator Carnival, the elements producer Tate & Lyle and the catalytic converters group Johnson Matthey. However it is usually replete with firms that make most or all of their earnings within the UK, such because the property trio British Land, LondonMetric Property and Derwent London, the housebuilder Bellway and everybody’s favorite sausage-roll emporium Greggs.
Briefly, the FTSE 250 is a significantly better information to sentiment in direction of UK firms than the FTSE 100.
The unhealthy information is that it is just up by a paltry 0.6% this yr to this point.
