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Four reasons why the FTSE 100 is riding high

Four reasons why the FTSE 100 is riding high
Paloma Kubiak
Written By:
Paloma Kubiak

The FTSE 100 hit record highs this month, and has gained 8% since the start of the year. What’s behind the rally?

The blue-chip index reached a record high of 8,433 on Friday, climbing daily in the month of May.

While today it has “paused for breath”, dipping slightly from the record set last week, it has already doubled gains this year compared to the 3.8% achieved in the whole of 2023.

Victoria Scholar, head of investment at Interactive Investor, says it’s “extremely encouraging from a confidence perspective”, but adds that the index “is not a barometer for strength of the UK economy”.

“Rather, it is an outward-looking index comprising largely of multinational conglomerates,” she explains.

Scholar adds: “There’s no denying that the UK economy is still grappling with issues from sluggish growth, above-target inflation, longstanding low investment, weak productivity, and struggling public finances.

“Nonetheless, optically, all-time highs for the FTSE 100 [are] extremely encouraging from a confidence perspective and may help change the narrative away from one focused on the exodus of big business from London’s public markets, towards one more focused on the opportunities within UK plc for investors instead.”

So, what’s behind the rally?

Scholar lists these four reasons for its comeback:

1) The FTSE is cheap

The FTSE 100 has majorly underperformed the US and Europe in recent years, so it became so cheap that investors started buying again.

Russ Mould, AJ Bell investment director, adds: “Investors now have to decide whether the UK is cheap because it (still) deserves to be cheap, or whether the times really are changing, because if they are, then further welcome gains could be on the cards.”

However, he adds: “It is possible that the FTSE 100 is cheap because it deserves to be.”

2) The pound’s value

The pound has been under pressure trading at multi-month lows, helping to support the FTSE 100. This is because many constituent companies make their money in US dollars and benefit from a stronger dollar and weaker pound.

According to Mould, the pound is yet to recover all of the lost ground in the wake of the Brexit vote in 2016.

3) Defence stock demand

The aerospace and defence sector has been powering gains for the index because of strong demand amid the global geopolitical uncertainty, with shares in Rolls-Royce and BAE Systems outperforming.

“BAE Systems’ market cap has jumped by around a quarter since the start of 2024, and has rallied more than 40% over a one-year period supported by geopolitical instability in the Middle East as well as the war in Ukraine that have both powered demand for defence spending,” Scholar says.

Meanwhile, engine maker Rolls-Royce has also been going from “strength to strength” as a stellar performer on the FTSE 100 ever since the appointment of Tufan Erginbilgic as CEO at the start of 2023.

Scholar says he has “spearheaded a successful turnaround for the engine maker”, helping the stock rally over 40% so far in 2024.

4) Mining stock M&A

Mining stocks have helped drive gains on the FTSE 100 thanks to speculation of M&A in the sector

“The mining sector has been another winner within the large cap UK market this year, fuelled by M&A speculation around Anglo American that has contributed towards its 35% share price surge year-to-date. BHP appears to be the main bidder, but Glencore is reportedly also eyeing a bid, which could prompt a bidding war and fuel further gains for the stock,” Scholar says.

She adds that Anglo’s copper assets are in high demand “because of their importance in the green energy transition as well as the metal’s significance in the artificial intelligence [AI] revolution too”.

“However, BHP’s bid for Anglo sparks concerns that London would lose yet another important listed company, adding to the narrative that UK plc is facing a mass exodus.”