FTSE 100 Hits Second All-Time High in Two Days
The FTSE 100, an index of the UK’s top 100 listed companies, closed at a new all-time high for the second consecutive day on Tuesday. The index reached an intra-day high of 8,075.52 at 8:24am and ended the session up 20.94 points, or 0.26%, at 8,044.81.
This marks a significant milestone for the premier index, which took just over a year to regain its previous peak of 8,047.06 achieved on February 16, 2023. In the time between, the UK economy has experienced various events and changes, including interest rate hikes and a recession that has likely ended.
At the time of the last peak, the Bank of England’s main policy rate, Bank Rate, was at 4%. It was later raised three more times, reaching 5.25% in August of last year. This was also around the time the UK economy entered a shallow recession, which has likely ended by now.
Following the February 2023 peak, the FTSE quickly dropped below the 8,000 milestone and hit a low of 7,206.82 on March 20, 2023, due to market turbulence following the rescue of Swiss banking giant Credit Suisse. It then fluctuated through the summer, revisiting those lows as concerns about rising inflation and central bank interest rate hikes grew.
However, as it turned out, interest rates peaked in the fall, with the last rate hike by the US Federal Reserve in July, the Bank of England in August, and the European Central Bank in September. This led to a rally in equity markets, including the FTSE, in the final quarter of 2023, as investors began to anticipate interest rate cuts in 2024.
Despite these recent gains, the FTSE has underperformed compared to other international stock indices this year. The S&P 500 in the US is up by 6.91%, Japan’s Nikkei 225 by 12.81%, and Germany’s DAX 40 by 8.30%. In contrast, the FTSE has only risen by 4.05%. This is a significant difference and shows that the FTSE is not performing as well as its international peers.
Furthermore, other European stock indices, such as Italy’s MIB (up 13.24%) and France’s CAC 40 (up 7.46%), have also outperformed the FTSE this year. This means that the recent back-to-back record highs for the FTSE are even more noteworthy.
One reason for this could be the recent weakness of the pound. On Monday, the pound hit a five-month low against a basket of currencies, following comments from Sir Dave Ramsden, a deputy governor of the Bank of England, about potential interest rate cuts. This made the pound weaker against the US dollar, which is significant as three-quarters of FTSE 100 companies’ earnings are denominated in currencies other than sterling, mainly the US dollar. This means that a weaker pound makes future earnings generated by these companies cheaper to buy in those currencies.
However, there may be other factors at play as well. Sterling rebounded today on comments from Huw Pill, the Bank’s chief economist, indicating that there may be more going on than just the pound’s weakness.
One possible explanation is that the FTSE is relatively cheap compared to its peers. It currently has a price/earnings (P/E) ratio of 13.22, meaning that £1 invested in the index today will be repaid in 13.22 years. This is lower than the P/E ratios of other major European indices, such as Germany’s DAX (14.87), France’s CAC (15.91), and Switzerland’s SMI (14.52). In contrast, the main US indices have P/E ratios of over 20. Only Spain’s IBEX is cheaper than the FTSE in this regard.
However, it should not be assumed that the FTSE’s recent rally is due to positive economic prospects for the UK. This is because the index is heavily skewed towards companies that do not operate primarily in the UK. For example, companies like Fresnillo, a Mexican gold and silver miner, Antofagasta, a Chilean copper and gold miner, and Ashtead Group, a US-based plant and tool hire company, derive the majority of their earnings from outside the UK. Even well-known British companies like BP, Rolls-Royce, BAE Systems, Shell, and Diageo, the world’s largest producer of scotch whisky and tequila, earn most of their income outside the UK. In fact, out of the 20 largest companies in the FTSE, only one, Lloyds Banking Group, generates most of its
