UK: FTSE 100 breaking 7,000 but be careful - Fidelity

Nick Peters, Multi Asset Portfolio Manager at Fidelity International, comments on the FTSE 100 leaping the 7,000 barrier.

Key Quotes

“Investors may feel optimistic now that the FTSE 100 has broken through the 7,000 barrier, but we might not want to crack open the champagne yet. The market has primarily been boosted by the sharp depreciation in sterling post-Brexit, with the pound having fallen by around 13% from its pre-referendum highs. Around 75% of the earnings from FTSE 100 companies come from outside the UK, so sterling depreciation effectively makes these earnings worth more. In essence, the boost to the FTSE 100 has come about because investors believe the UK economy is in a worse place.

“Investors may also be buying the FTSE 100 for its yield, which at around 4%, is significantly higher than the yield on UK Gilts, with the benchmark 10 year measure having fallen below 0.60% for the first time in August. There’s also been a sharp divergence within value names in the FTSE 100. Sectors like miners and oil explorers have boosted FTSE 100 performance this year, primarily on the back of higher commodity prices, with some like Anglo American having seen their share price more than triple. Banks, however, have performed badly, with investors fearful over the consequences of slowing economic growth in the UK and lower net interest margins.

“Going forward, sterling is likely to depreciate further so we could see the FTSE 100 head higher still. Other potential positive drivers include the oil price moving towards our expected $50-60 range. This will obviously boost the earnings of the likes of index heavyweights such as BP and Shell. Another perhaps medium-term  driver would be signs that monetary policy and (much hoped for) fiscal policy lead to a pick-up in economic growth. A subsequent pick up in interest rates and rebounding bond yields would be a significant boon for the financials which make up a significant part of the index.”