The FTSE 100 reached its second all-time closing high in as many days.
The index of the UK’s 100 largest listed companies, having previously reached a new intraday high of 8,075.52 just after 8.24am on Tuesday, ended the session up 20.94 points, around 0.26%, in 8,044.81.
It is worth reflecting that there is taken just over a year ago for the main index to reclaim the summit last reached when, on February 16, 2023, the FTSE reached dizzying peaks of 8,047.06.
A lot has happened since then.
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When the FTSE last peaked before this week, the Bank of England’s main policy rate – the Bank Rate – stood at 4%, with the monetary policy committee increasing it three more times, bringing it to current 5.25% in August. last year.
At that time, the UK economy had already entered a recession, albeit a very shallow one, from which, in all likelihood, it has now emerged.
Shortly after the FTSE reached its peak in February last year, it quickly surrendered to the 8,000 mark, falling to 7,206.82 on March 20 last year, as markets twitched after the rescue of Swiss banking giant Credit Suisse.
Then he meandered through most of the rest of the summer, revisiting those lows as concerns grew that central banks around the world would continue to raise interest rates in the face of rising inflation.
As we now know, interest rates peaked in the autumn, with the US Federal Reserve’s last hike occurring in July last year, the Bank of England’s in August and the European Central Bank’s in September. The final quarter of last year saw stock markets around the world, including the FTSE, rise as investors began to price in interest rate cuts during 2024.
It’s worth noting, though, that the FTSE has been a relative laggard this year.
Stock markets in the US and many other European markets have seen a stronger recovery over the past year. Photo: Reuters
The S&P 500, America’s main stock index, is up 6.91% so far in 2024, Japan’s Nikkei 225 is up 12.81% and Germany’s DAX 40 is up 8.30%. The FTSE, on the other hand, was up just 4.05%, even after recovering in recent sessions.
Therefore, it can hardly be said that it is performing well compared to its international peers.
In addition to those already mentioned, the MIB in Italy grew 13.24% this year and the CAC 40 in France 7.46%, for example.
However, the FTSE reaching a new record close for two days in a row is remarkable.
There is no shortage of reasons for this.
The most obvious is the recent weakness of the British pound. The pound hit a five-month low against an international basket of currencies on Monday, following comments from Sir Dave Ramsden, deputy governor of the Bank of England, on Friday afternoon in which he pointed to the rising probability of interest rate cuts in the near future.
This weakened the pound against the US dollar in particular. Given that three quarters of the profits of FTSE 100 companies are denominated in other currencies, mainly the US dollar, a fall in the pound against these currencies makes future profits generated by FTSE companies – whose shares are denominated in pounds sterling – cheaper for buy in these currencies. coins.
That was certainly behind the big rally seen on Monday – although today sterling rose on comments from Huw Pill, the Bank’s chief economist, who suggested there was more going on.
That something is the relative low cost of FTSE compared to its peers. The FTSE currently trades with a price-to-earnings (P/E) ratio of just 13.22 times – in other words, £1 invested in the index today would be repaid 13.22 years from now. This is cheap when compared to the DAX in Germany, which trades at a P/E of 14.87 times and the CAC in France, which trades at a P/E of 15.91 times, or the SMI in Switzerland, which is 14.52 times.
The main US indices, however, fluctuate at P/E ratios above 20 times. Only Spain’s main stock index, the IBEX, looks cheaper than the FTSE by comparison.
The conclusion that should not be drawn is that the recent recovery in the FTSE has something to do with the UK’s economic prospects, although these are visibly improving.
The index is full of companies that have little or nothing to do with the UK – such as Fresnillo, a Mexican gold and silver mining company; Antofagasta, a Chilean copper and gold mining company and Ashtead Group, a plant and tool rental company that makes £90 out of every £100 it earns in the US.
Even companies considered British, such as BP, Rolls-Royce, BAE Systems, Shell and Diageo, the world’s largest producer of Scotch whiskey and tequila, make the vast majority of their profits outside the United Kingdom. In fact, of the 20 largest FTSE companies, only one – Lloyds Banking Group – earns the majority of its income in the UK.
For a better assessment of Britain’s business performance, investors are best off looking at the FTSE 250, the next 250 largest companies listed on the London Stock Exchange and home to household names such as Bellway, Games Workshop and ITV.
Some of them also make a good chunk of their profits outside the UK, such as cruise operator Carnival, ingredients producer Tate & Lyle and catalytic converter group Johnson Matthey. But it’s also full of companies that make most or all of their profits in the UK, such as property trio British Land, LondonMetric Property and Derwent London, construction company Bellway and everyone’s favorite sausage emporium Greggs.
In short, the FTSE 250 is a much better guide to sentiment towards UK companies than the FTSE 100.
The bad news is that so far this year it has only increased by a paltry 0.6%.
This story originally appeared on News.sky.com read the full story
