As the FTSE matches its all-time high, Darius McDermott, managing director of FundCalibre, looks at the underlying reasons for its rise and whether this upward trajectory might continue.
2022 was a good year for the UK’s largest companies. While almost every other major stock market experienced declines, the FTSE 100 rose 4.7% over the calendar year*.
And, despite the chaos caused by the Truss-Kwarteng budget just three months ago, this week the UK’s leading index matched its all-time high. At the time of writing, it was 7,866 – just 37 points off its May 2018 intra-day high of 7,903 and 2 points ahead of the end of day figure that day.
The big drivers of performance in the FTSE 100 have been the mega caps – the 20 or so very largest companies in our stock market.
These companies, particularly those in the healthcare and the oil and energy sectors, have benefitted from being global businesses and dollar earners – so when the dollar has appreciated against the pound it has been to their advantage.
AstraZeneca, for example, has seen its stock price rise by more than 30% over the past 12 months**, while the likes of Shell, BP, Rio Tinto, and Glencore are up 49%, 50%, 32% and 57% respectively**.
From the names above you can also see that oil and mining companies have also benefited as the cost of commodities has increased. Our ‘old fashioned economy’ has come into its own when more modern sectors suffered.
Can the good times continue?
The market is still under-owned by global investors. So, money could potentially come back as investors begin to appreciate the unique composition of the larger end of our stock market. Even if inflation falls, we don’t think it will go back to 2% any time soon and, in this different environment, UK companies could continue to do well.
If you believe in the electrification story, it also bodes well for the mining companies. There are very few listed elsewhere in the world, so this is a medium to long-term trend that could boost these companies.
But if we get a deep recession a lot of these areas are quite cyclical, so the FTSE 100 could also see its value fall. And with so much uncertainty in the world, there is likely to be volatility either way.
Should you invest in the UK stock market today?
If I was investing in the UK today, I would look beyond just the FTSE 100.
This part of the market has already enjoyed a decent run, and although it may continue, I do see value in the smaller and medium-sized companies that had such a bad time last year.
One option would be to invest in a multi-cap fund – a fund that invests in UK companies of all sizes: large, medium, and small.
Here are three such vehicles, which are Elite Rated by FundCalibre:
IFSL Marlborough Multi-Cap Growth
This fund takes an unconstrained approach, investing in small, medium, and large UK companies. It will be concentrated in around 40-70 names – principally in businesses that are leaders in their sector and that can grow regardless of the prevailing economic landscape.
JOHCM UK Dynamic
Manager Alex Savvides uses a distinctive ‘change’ investment strategy, looking for sustainable improvement from stocks which can create idiosyncratic sources of return. Alex is a pragmatic manager, and not afraid to look at companies that have been beaten up by the market. The portfolio is multi-cap, often with a mid-cap bias.
SVM UK Opportunities
This fund is a hidden gem in the crowded and highly competitive UK market. The team has the flexibility to invest across the market cap spectrum in the UK and, while the fund has a value tilt, it is not beholden to a fundamentalist value philosophy and the manager will invest in growth stocks where he sees opportunity.
*Source: FE fundinfo, total returns in sterling, calendar year 2022.
**Source: FE fundinfo, 17 January 2023, total returns in sterling
Past performance is not a reliable guide to future returns. You may not get back the amount originally invested, and tax rules can change over time. Darius’s views are his own and do not constitute financial advice.
[Main image: frans-ruiter-x1Py2nXR-wc-unsplash]
