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4 factors that have helped power the FTSE 100 higher

28 May 2018

Following February’s volatility, why has the FTSE 100 now broken through its previous high? Russ Mould, investment director at AJ Bell, takes a view

I see four distinct factors that have helped take the FTSE 100 to an all-time high.

1. The FTSE 100 underperformed its global stock market peers in total return, sterling terms in 2016 and 2017, something that will have not gone unnoticed by contrarian bulls.

2. Unloved often means undervalued and the UK is not expensive relative to its international peers or its own history on an earnings basis, with the FTSE 100 trading on around 14 times consensus earnings estimates for 2018. In addition, there are a number of sectors – oils, retailers, real estate, house builders – which offer lowly valuations, attractive yields or both and therefore have the potential to surprise on the upside in 2018.

3. The pound’s latest swoon is a further bonus – the FTSE 100 gets a good two-thirds of its earnings from overseas and the lower the currency goes, the more those profits are worth in sterling terms. The weak pound has the additional advantage of making British assets cheaper for overseas buyers and if sterling keeps sliding there has to be a chance for fresh bids to emerge for British firms – Sky, Smurfit Kappa and Shire are already all FTSE 100 firms that are subject to approaches from overseas firms.

4. The FTSE 100 offers a dividend yield above 4%, according to an aggregate of consensus dividend forecasts for each individual constituent. This beats cash and the 1.49% yield offered by the benchmark 10-year Government bond, or Gilt, hands down. Such a yield could be a source of support for the index and chip in a healthy percentage of total returns from UK stocks in 2018. Granted, dividend cover is thinner than ideal, but the higher the oil price goes the safer the dividend yield from BP and Shell becomes and they represent nearly a fifth of total dividend payments between them.

“All eyes now will be on whether the FTSE 100 can break through the 8,000 barrier.  Admittedly 8,000 does not leave a lot of capital upside for the rest of the year. But if it gets there and stays there that would be a 4% capital gain for the year with a 4%-plus dividend yield on top – still miles better than cash or bond yields, and nicely ahead of inflation.

“I suspect a lot of people would have been happy with that had you offered it to them at the start of the year – and now that the index has had a good run and is attracting a lot more positive comment it is probably time to be a little more circumspect and not get too carried away.”

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