Whenever we see headlines about a major stock market index hitting all time highs we start feeling nervous. It’s natural. Often fund managers start losing sleep around now, economists begin babbling about ‘frothy markets’ and big investors start to quietly move cash into money market funds.
Investors need to bear in mind that with the FTSE 100 around 75 to 80% of the variation in its stock prices can be explained away by foreign rather than domestic influences. For FTSE 100 companies it goes up to 90% if you look at it over a five year horizon. You really need to look at the global influences that are driving the FTSE 100 companies, not the local UK economic factors.
“The first and easiest point to make is that in a growing global economy all-time highs for stock markets should not be the norm nor the exception,” explains William Hobbs, head of investment strategy at Barclays. “Much like GDP, corporate profits will be reaching all-time highs on a regular basis, therefore so will the share prices and total returns on which they are based.”
Hobbs says that the FTSE 100 also leans relatively heavily towards the commodities sector. Hence higher oil prices will also be beneficial.
He also sees what he calls some offsetting factors for the FTSE that make it less favoured over at Barclays. In a world where cyclical prospects remain bright, outside of its commodities exposure, the FTSE 100 companies leave investors with relatively less skin in the cyclical game than other stock markets. The FTSE is relatively weighed down by its heavy exposure to the more defensive sectors such as consumer staples, utilities and pharmaceuticals while the banking stocks lack the recovery appeal of the more consistently troubled European banking market.
“In spite of a relatively appealing valuation and an already disenchanted investors community, we see greater short term upside in the markets of US, continental Europe and emerging Asia,” says Hobbs.
In the short term, the weak pound and improved global risk sentiment (which could prove to be tragically short term in nature) seem to be boosting the FTSE 100 companies.
“Can it keep going?” asks Neil Wilson, chief market analyst at Markets.com. “The question really depends on what happens to the pound this week amid what is a pretty heavy week for events. Brexit talks start tomorrow amid renewed doubts about progress on a deal.”
Wilson thinks that political risks like the talk of another Scottish referendum on independence and the possibility of a snap election are already priced in but feels any discussion of further political turbulence will impact the FTSE 100 in the short term. There are also some noteworthy UK economic releases to consider, including the UK CPI (inflation) numbers, due to be released today, retail sales on Thursday and a second GDP estimate on Friday, all of which will be watched closely by investors.
“With negative sentiment dominating, there is potential for a bullish surprise from the data and this might put a floor under sterling and cool the FTSE’s rally,” Wilson says. “On Brexit, while we expect no significant progress, it also seems unlikely that we will see a major setback this week. Talk of the FTSE hitting 8000 seems a bit outlandish but if the pound does skip back to 1.30 on a concoction of weak eco data, BoE dovishness and Brexit setbacks, it would not be out of the question.”