Tom Stevenson, Investment Director, Fidelity International, comments: “The FTSE 100 hit a new all-time high this week, recovering and then exceeding the previous record set shortly before tensions in the Middle East escalated at the end of February. The strong performance of the UK’s benchmark stock market index builds on six consecutive quarterly gains, the best run for the UK market since the recovery from the Covid pandemic. Perhaps most surprisingly, it comes despite heightened volatility in global stock markets, most notably in the AI-related shares listed mainly in the US and Asia.
“There are six main reasons why the FTSE 100 has proved relatively resilient.
1. Low technology weighting
“The FTSE 100 is behaving much as we might expect an ‘old economy’ index to behave. While the Nasdaq has fallen 10% from its 2 June peak, Japan’s Nikkei 225 is 14% below its 22 June high and Korea’s Kospi has lost around a third of its value over the same period, the UK market has been relatively insulated by its limited exposure to technology. Those technology-heavy markets are more dependent on the small group of companies that drove global equities higher during the first half of the year, but which are now facing greater investor scrutiny over the sustainability of the AI boom. The Korean market is dominated by chip makers Samsung and SK Hynix, which slumped this week after disappointing investors. Taiwan is heavily influenced by another chip maker TSMC. In the US, Nvidia was the market’s largest company until Apple reclaimed the top spot this week.
2. Rising oil price
“Renewed tensions in the Middle East have pushed the oil price higher, which for most markets is viewed mainly as a driver of inflation and, as such, a negative influence on interest rates and growth. While this is also true in the UK, the impact is mitigated by the FTSE 100’s big exposure to oil companies. BP and Shell account for roughly a tenth of the value of the UK’s benchmark. The two stocks are 10% and 5% higher, respectively, since the start of March. At their peak they were more than 25% and 15% up.
3. Other commodity exposure
“The FTSE 100 is also heavily exposed to non-oil commodity stocks like Rio Tinto, Glencore, Anglo American and Antofagasta. Commodity prices have been supported by expectations of further Chinese stimulus and concerns about constraints on global supply. This gives the FTSE another important source of earnings that is largely independent of the AI investment cycle.
4. Resilience to higher bond yields
“Rising interest rates negatively impact the valuation of growth companies so fears that the Federal Reserve may raise rates two or three times over the next year or so provide a headwind for tech stocks. Banks can be more resilient in this environment. UK banks make up a meaningful part of the UK market and may benefit from stronger lending margins and higher net interest income, although the effect will also depend on the health of the wider economy and demand for borrowing.
5. Cheap valuation
“The FTSE 100 continues to trade at a substantial valuation discount to the US market while offering investors a significantly higher dividend yield. That combination is increasingly attractive as investors become more cautious about paying high prices for future growth.”
6. Political change has not unsettled markets
“UK financial markets have remained relatively stable through the recent political transition. During that period, the 10-year gilt yield has traded within a range of approximately 4.7% to 5.1%. It stood at 4.75% at the beginning of the period and is 4.99% at the time of writing. Over the same period, the FTSE 100 has risen by 3.4%. This suggests that recent political developments have not prompted a significant repricing of UK assets, although it is important to remember that government bond yields are also influenced heavily by global factors such as geo-political uncertainty and inflation expectations.”
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