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FTSE edges closer to all time high

Cherry Reynard
Written By:
Cherry Reynard

The FTSE 100 index edged up towards an all-time high this week, adding 2%.

The UK’s benchmark index hit levels not seen since the start of the year, fuelled by merger and acquisition activity, a surge in oil prices and the promise of lower interest rates.

The index has been driven higher by the announcement of a tie-up between Sainsbury’s and Asda, and news that the Bank of England is going to keep rates on hold has also played a role.

However, rising oil prices have been the key to the FTSE’s recent surge. Shares in the energy companies have risen on expectations that the break-down of the Iran nuclear deal may push up oil prices.

RBS has also been a strong performer after a settlement of £3.6bn was agreed between the bank and the US over its handling of mortgage bonds. Investors are optimistic that this marks the end of an era for the troubled bank and the shares have rallied.

Can share prices be sustained from here?

Logic would suggest that it is better to buy shares when they are cheap, rather than when they are at near-time highs. However, there is reason to believe that the FTSE 100 may be able to keep going for some time.

Roland Arnold, manager of small and mid cap UK equity portfolios at BlackRock, said: “The bulk of the companies we look at are doing well because they are internationally exposed and the global economy is doing well. Apart from the subset of the UK consumer, there hasn’t been much change in the outlook.

“When we meet asset allocators, many are underweight the UK because of all the issues. According to the monthly Merrill Lynch Fund Manager Survey, global fund managers are more underweight the UK than they have ever been. When you are that underweight, there is only one way for investor sentiment to go.”

The UK stock market has lagged its global peers for some time because of concerns over the Brexit outcome and political weakness. This means that share prices are generally cheaper in the UK than they are elsewhere. The price to earnings ratio for the FTSE 100 – an indication of how expensive stocks are relative to their revenue and profits – is just 14x. This compares to almost 25x for the S&P 500.

FTSE 100 companies also pay far higher dividend yields. The current average yield for FTSE 100 companies is 3.8%. This is the highest of all developed markets.

As such, even if the UK does hit a new high next week, there might still be room for investors to grow their savings.