The FTSE 100 index comprises the 100 largest UK firms, often dubbed ‘blue-chips’, listed on the London Stock Exchange (LSE).

Last night, it broke through the 8,000 level – a “psychological milestone” for investors, according to Russ Mould, investment director at AJ Bell.

However, he explained that much of the success of the UK stock market over the last year can be traced back to Russia’s invasion of Ukraine.

“This helped buoy the share prices of the oil and gas sector, and the financial sector too, as the fight against increased inflation has meant interest rates have also had to rise, boosting bank reserves. A weak pound has also helped propel the Footsie upwards, thanks to all the overseas earnings made by the companies within it,” Mould said.

Elsewhere, the threat of recession is “already priced in”, while lower oil prices, a mild winter and the energy bills support are “helping take some of the pressure off consumers” as wages rise.

Mould also suggested that the FTSE 100 climb is down to hopes that the inflation rate has peaked and will continue to fall. This in turn could lead to the Bank of England pivoting from rate rises to rate cuts. This all adds to the optimism for investors and the markets.

Health of UK stock market

When looking back at the last time the FTSE 100 broke through a milestone threshold (7,000), this was almost eight years ago, while the climb from 6,000 to 7,000 took almost 17 years, according to Mould.

He added that while the FTSE 100 index is the most widely used barometer of the health of the UK stock market, it doesn’t include dividends “which are a key component of investor returns”, and it also excludes medium and smaller companies that trade on the UK stock market.

He said: “Since the index crossed the 7,000 mark, it has risen by 14.3%, but with dividends reinvested an investor would have actually made over 50% on their money.

“The FTSE All Share is a better measure of how the UK stock market as a whole is performing. The FTSE 100 has had a very good year, but over the longer-term it’s the smaller companies and midcaps which have stolen the show, and helped to propel the returns from the FTSE All Share beyond those of the FTSE 100 alone.”

Mould highlighted that the FTSE 100 returned 9.6% in one year (Source: FE total return to 14 February 2023), while the FTSE All Share returned 6.9%. However, over a 10-year period, the returns were 83.2% and 86.2% respectively. Over a 20-year period, it stood at 362.6% and 405.8% respectively.

“So while the headline FTSE 100 index is a perfectly good measure of day to day market movements, investors shouldn’t be fooled into thinking it’s an accurate reflection of long-term returns from the stock market,” he added.

Record Centrica profit and Relx returns help maintain momentum

The FTSE 100 rose another 0.4% this morning to 8,032 which Mould said is “refreshing”.

“Helping to drive the index on Thursday was Relx, up 3.2% after its full-year results were well received. Despite being one of the UK market’s biggest companies, Relx tends to stay out of the spotlight and is often underappreciated by investors. In a nutshell, it provides information to people working in industries such as legal and insurance to help them do their job in a better way,” Mould said.

Meanwhile, Centrica, the parent company of British Gas which is the UK’s largest energy supplier posted record annual profit today of £3.3bn.

This is triple the figure posted in the previous year and comes amid allegations that a third party it used to install prepayment meters broke into the homes of vulnerable customers.

It resulted in an apology from the CEO as it confirmed it will no longer remotely switch struggling customers to prepayment meters – but wouldn’t stop the forced physical installation of them.

It is currently under investigation by the regulator, Ofgem, which asked suppliers to pause this practice, before energy suppliers agreed to stop forced meter installations.

Mould said today’s results from Centrica “will do nothing to dial down the heat on the company”, adding that “talk of more aggressive windfall taxes seems inevitable”.

He said that most of the record profit came from its energy trading division, as well as oil, gas and nuclear assets rather than from its retail-facing British Gas business “but casual observers are unlikely to make the distinction”.

Mould added: “Investors in the company might argue after years of disappointing returns they are due some bumper rewards. However, the fact a big driver of Centrica’s soaring earnings and cash flow is the energy crisis resulting from the war in Ukraine will sit uncomfortably with many struggling to heat their homes.

“Whether fair or not, the argument will be made the company is taking money out of the pockets of billpayers and doling it out to shareholders.”