The FTSE 100 climbed above 8,000 for the first time on Wednesday afternoon, planting its flag in a new peak after a run of new record highs in the past few weeks.
Even for some seasoned investors, it does not wholly make sense that the UK stock market benchmark is breaching new all-time highs as the economy teeters on the edge of a recession amid a cost of living crisis and waves of industrial action.
But there are several logical reasons behind it – well, depending on who you talk to. ‘Pick your own’ reasoning is often the way with markets.
A prime explanation in this case is that the Footsie is seen as undervalued in comparison with its rivals, full of companies that are relatively cheap versus global equities.
What’s more, most of the index constituents have very little to do with the UK economy, with around three quarter of earnings made overseas.
This includes “old economy stalwarts that outperform in recessions and during inflationary periods”, says Neil Wilson, chief market analyst at Finalto, by which he means the index’s heavy weighting towards energy, commodities and financials.
These were prime drivers last year as the FTSE 100 was the third best performing index in the world, behind only India’s and Brazil’s benchmarks – although its measly 0.6% gain was far better than the 29% plunge for the Nasdaq and 16% fall for the S&P 500.
As points out Joachim Klement, equity strategist at Liberum, the index’s commodity heavyweights benefitted from the war in Ukraine, banks benefitted from rising interest rates and miners had a rollercoaster year.
Or, as James Penny, chief investment officer at TAM Asset Management, says, “the main sectors of the UK’s large cap index are having their day in the sun compared to the previous decades which have seen these sectors trailing … the high flying growth sectors which have predominantly been the preserve of the US market”.
As a result, he says the London blue-chip index’s relative outperformance has been “mechanical”, though others put it more dismissively.
“Even a blind chicken,” says private trader Vince Stanzione, “finds a piece of corn every now and then.
“The recent all-time highs in the FTSE 100 should be viewed in the context that it's really been a poor performer for the last 22 years.
“Had you bought the index in the year 2000 you would be up 20% - yes you would have received dividends but overall the returns have been poor and nothing like the S&P 500, up over 180%.”
The reason being the index’s low exposure to technology, with this lack of excitement leading some in recent years to call it “boring, full of dead wood and maybe even pointless”.
What’s behind the Footsie’s new highs in 2023?
China’s reopening been an essential ingredient for the mining giants recently, while markets globally have been buoyed by the possibility that the US Federal Reserve will engineer a soft landing.
“The dominant theme as the FTSE 100 grinds higher seems to be that ‘better times are coming’,” says Russ Mould, investment director at AJ Bell, “especially after the share price crushings handed out to a lot of cyclicals and consumer discretionary names in the first half of 2022.”
With analysts having already slashed earnings estimates, so a lot of bad news is “already priced in” to shares last year, he says, with lower energy prices and a mild winter in Europe helping, with inflation forecast to start to cooling.
With interest rates pausing and the market expecting the Bank of England to start pivoting to rate cuts in the second half, Mould says, “in sum, it will all get better”.
“Plus you can still argue that the FTSE 100 represents decent value, on a price/earnings ratio of barely 11 times with a yield of 4%, especially to overseas investors who get the additional benefit of the [weak pound].
“The bear case always looks most compelling at the bottom and there is an old saying that you can have cheap shares and good news, just not both at the same time.”
The first few months of 2023 have seen some subtle changes too, including a “healthy broadening” in terms of the types of stocks driving the rally, says Wilson, including a lift for the index from its posse of domestically-oriented stocks from the lows reached after the calamitous ‘mini budget’ in the autumn, with housebuilders for example rebounding over 10%.
“A cheap pound plays a role too – in dollar terms the UK market is not an all-time high,” he notes.
Stanzione says the new highs are in part due to the FTSE 100 containing many stocks that are seen as “fairly defensive and reasonably valued compared to US counterparts – and with its more established less flashy constitutions the index may have found a new following.”
The contrast between the FTSE 100 and other market indices is stark, with FTSE 100 now up 6.8% since the start of last year, while its sister index the FTSE 250 down 13.5%.
The FTSE 250’s mid-cap constituents are a lot more domestically focused, making this index much more representative of the UK economy.
Looking abroad, the Stoxx Europe excluding the UK is down 7.4%, while the S&P 500 in the US is down 13.6% since the start of 2022.
Can the FTSE reach 8000?
It is possible that the factors that boosted the index last year and recent weeks keep lifting the index higher – or even be joined by new forces.
Liberum’s Klement reckons further highs are likely in coming weeks – meaning the FTSE is likely to top 8,000, but he then sees the index running out of steam.
“None of the factors are repeatable and in fact, we expect that oil prices will decline as economic growth slows down in the US, the UK and Europe and miners are likely to correct once it becomes clear that China is not growing as fast as it used to and the re-opening boom has passed.
“So looking ahead, we think that in the next couple of weeks new all time highs in the FTSE 100 will persist.”
Where will the FTSE 100 be by the end of 2023?
As ever, there are bull and bear predictions.
By at the end of 2023, Klement is pessimistic for the index: “We don’t see any major advances in that index and possibly lower index levels later in the year.”
Similarly, Penny sees silver linings that could be dark clouds for the Footsie.
“A China slowdown, global inflation coming back to 2% and a successful negotiation of peace for Ukraine are all elements which could lose the FTSE 100 its crown in 2023,” he says.
But then on the other hand, he says he “can envisage the forces which are driving the FTSE 100 higher to continue to remain in play for the first half of this year and likely into the end of the year.”
Mould predicted a succession of new all-time highs being set through the year to reach a year-end high of 8,250, “all other things being equal”.
This would leave the index on a PE of 12 and a yield of 3.8%, “neither of which looks demanding”.
However, “all other things being equal” is doing a lot of heavy lifting there, especially with the sort of perfect storm of economic and geopolitical horrors seen in recent years, and he notes that there are “more than enough variables to make second-guessing the markets even harder than usual”.
Not forgetting the FTSE’s smaller sibling, Victoria Scholar, head of investment at Interactive Investor, foresees a scenario where London’s blue-chip index is outperformed by its smaller sibling.
As the FTSE 250 is more UK-focused, the easing of political uncertainty and possibility that the UK could skirt a recession as the BoE takes its foot off the brakes could see a tailwind from the “revival of the opportunistic investor, pouncing on beaten up stocks”.
While not out of the woods yet, Scholar predicts less disparity between the two UK indices.
“2023 will be a bumpy ride amid tough macroeconomic conditions, but there are growing opportunities for investors in both indices, with the potential for the FTSE 250 to lead the way.”
