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A cautious US Federal Reserve and slightly higher-than-expected inflation in the UK this week have derailed some of the recent momentum that has taken the FTSE 100 to record levels this year.
But improving economic performance, reducing inflation and expectations of imminent interest rate cuts have revitalized interest in the FTSE 100, driving the index up about 9.4 per cent since the start of 2024 to 8,479 per cent. last week.
The blue-chip index has lagged global peers in recent years as Britain’s weighting in global indices has shrunk, Brexit has kept international investors at bay and Brits continue to withdraw cash from the funds invested in its domestic market.
So could the FTSE 100 have finally turned a corner and passed the all-important (although ultimately insignificant) milestone of 9,000 this year?
The FTSE 100 has racked up solid gains this year, but can it continue to rise?
What’s behind the recent push?
UK assets have generally been considered cheap by analysts for some time now: the entire UK market is currently at a cyclically adjusted price-to-earnings ratio of 19.5 times, compared to 38.6 times in The USA.
And while investors might finally be waking up to that, the recent momentum is largely the result of a rising tide that is lifting all boats.
Japan’s S&P 500, Euro Stoxx 50 and Nikkei 225 have added 12.2, 11.5 and 16 percent respectively since the start of the year, outperforming the FTSE 100.
“This is an encouraging result for long-suffering investors in the UK benchmark, but we shouldn’t get carried away with ourselves,” says Laith Khalaf, head of investment analysis at AJ Bell.
“The rise in the Footsie has been part of a global risk rally over the past month.”
However, the FTSE 100 continues to attract interest thanks to improved GDP projections, inflation returning to target and strong corporate earnings data.
On top of this, the Bank of England looks set to outperform the Federal Reserve with its first rate hike this summer, albeit a couple of months later than expected.
Alex Campbell, of investment platform Freetrade, says: ‘After closing at all-time highs in several sessions over the past few months, the FTSE 100 appears to have finally broken through.
“With UK economic activity starting to pick up pace, it looks like we may finally be approaching a crucial moment for the London market to raise rates again.”
But Paul Jackson, global head of asset allocation research at Invesco, warns that the fortunes of the FTSE 100 will remain tied to “continued confidence in global markets”.
He says: “The most important thing is that I think it will come down to faith that US inflation is coming down and that the Federal Reserve will cut rates later this year.”
What could derail the FTSE 100’s progress?
Jackson adds that any further positive surprise for US inflation, which has proven to be much tougher than the Federal Reserve had expected, would further fuel interest rate cuts in the US – “and perhaps even justify further increases.” of rates”.
‘Another linked factor could be a deterioration in the US economy such that a recession appears likely (which would undermine profits and increase default rates).
‘Otherwise, geopolitical factors could have a detrimental effect… especially if they threaten the global economy.
“Specifically for the UK it would be positive surprises for the country’s inflation, negative surprises for UK growth, an extreme weakening of commodity prices and perhaps the threat of a hung parliament after the next election generals”.
Sam North, market analyst at eToro, says disappointing economic growth data, a run of poor corporate profits or changes in rate cut expectations “could derail” the FTSE 100’s impressive run.
So can the FTSE 100 hit 9,000 – or even 10,000 – this year?
North believes the FTSE 100 hitting 9,000 this year is “within the realm of possibility” as it would require additional gains of around 10 per cent this year.
But reaching the 10,000 level “would be the best year for the FTSE 100 since 2009, when it rallied more than 36 per cent”, he adds.
Freetrade’s Campbell says: ‘For the London market to continue and return to a trajectory that more closely resembles that of its growth-focused US counterparts, we need to see some fundamental changes to its composition.
‘High-growth companies attract investors eager for that growth and happy to take the risks that pursuit entails.
‘But if London listings manage to attract a bid, the result will be deeper, more liquid and attractive markets for British and foreign companies to list.
‘From now on FTSE 12,000.’
The FTSE 100 has been a strong performer so far in 2024, but has struggled to maintain momentum over the past five years.
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