Home Brokerage Why the FTSE 100 hit an All-Time High

Why the FTSE 100 hit an All-Time High

by internationalbanker

By Phillip Mann – phillip.mann@internationalbanker.com

On Friday, March 20, the FTSE 100 breached a threshold level that had been elusive for quite some time. The UK’s benchmark blue-chip share index finally crossed the 7,000-mark, having threatened to do so on a few occasions during the last 15 years. The index closed at 7,022 on that Friday and has since hit an intraday all-time high of 7,064, before declining modestly in the last week to 6,855:


FTSE 100, 1998 – present (source: London Stock Exchange)

The FTSE 100 is one of several major stock markets that have broken through key psychological barriers in recent times—the Nasdaq in the US and the German DAX surpassed the 5,000 and 12,000 marks respectively, with both also hitting all-time highs, while Japan’s Nikkei reached a 15-year high within the last week.

It should be noted that the majority of companies listed on the FTSE 100 derive their revenues from outside the UK. A report by the Capital Group produced at the end of 2013 revealed that previous consensus estimates of two-thirds of FTSE 100 turnovers being generated from overseas sales were an underestimation—the actual figure is sizeably higher at 77 percent. Emerging economies contribute to 30 percent of the index’s revenues, the US about 19 percent and Europe (excluding the UK) 17 percent. Attributing the FTSE’s recent performance solely to the UK’s economy’s performance, or using the FTSE as a gauge of the UK’s economy’s health, is therefore somewhat misleading.

Nevertheless, the loose monetary environment within which the UK, the US and the Eurozone economies currently operate is undoubtedly a significant contributory factor to record levels seen by the FTSE and other equity markets. The Federal Reserve’s chief, Janet Yellen, announced last week that an increase in US interest rates may follow a more muted future path than the Fed previously indicated. The weakening of the US dollar, which resulted from Yellen’s announcement, contributed to a rally in mining stocks, such as BHP Billiton, which climbed more than 12 percent during the same week, as copper prices hit a two-month high.

Expansionary monetary policy has also been in place in the UK and the Eurozone for some time. The ECB and the Bank of England have stimulated market growth through keeping their benchmark interest rates close to zero in a bid to encourage economic growth. The UK now finds itself in a position of having experienced accelerating growth, low inflation and falling unemployment over the last year or so, thus making conditions increasingly suitable for pro-cyclical stock market investment.

The ECB recently began its programme of quantitative easing, which has encouraged investors to exit bond markets, where yields have significantly declined, and move into equities. The Eurozone is also starting to produce positive economic data releases, with GDP growing at 0.9 percent in last year’s final quarter, unemployment  falling and inflation expected to enter positive territory again in the coming months.

Additionally, the Eurozone received a large dose of confidence last week after Greece was promised more funding from its creditors on the proviso that it adopts a programme of austerity for its beleaguered economy, and to that effect, produces a list of internal reforms that demonstrates its commitment to fiscal responsibility. The renewed optimism over Greece is now being cited as providing the main impetus in pushing the FTSE over 7,000.

However, given that the FTSE’s previous intraday high of 6,950.60 was recorded at the end of 1999, and was only surpassed in the last few weeks, one can reasonably assume that the FTSE has in fact underperformed during the last 15 or so years. It can also be concluded that the current record levels that the FTSE is experiencing have been long overdue, and that the breach of the 7,000-mark is not a necessarily noteworthy achievement.

Moreover, stock markets in Italy and Germany have witnessed rises in excess of 20 percent this year, while the FTSE has risen only by about 7 percent. Indeed, the Financial Times recently reported that while German equity funds have seen a $4.3-billion increase in value this year, UK funds have experienced withdrawals amounting to $2.2 billion during the same period. Eurozone quantitative easing may explain this divergence to a degree; however, the underperformance of oil and gas stocks resulting from the global oil-price slump has also been a major factor. Oil and gas stocks make up 15 percent of the FTSE 100, making it the index’s largest represented industry.

Given the uncertainties over the UK’s general election in May, analysts are expecting further stock market volatility, which means that the FTSE may scale further heights in the coming weeks.

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