When trading closed on Monday afternoon, the Footsie was only just shy of 7,500 — a figure that has become something of a benchmark in recent years. The last time the FTSE 100 has closed above 7,500 was early June — a full two months ago.
So let’s take a closer look at why the FTSE has been gaining and what this means for me as an investor.
Breaking 7,500
The FTSE 100 was launched at 1,000 points on January 3, 1984. When it passes 7,500, it will mean that the value of the 100 biggest companies listed in the UK will be 7.5 times the value of the largest 100 firms 38 years ago.
And this is a good point to highlight that, despite the recent volatility, the general trend is upward. That’s why I invest in stocks on a frequent basis as part of my long-term strategy.
The index has pushed above 7,500 on many occasions in the last five years, but has rarely seen a sustained period above this figure. And there are several specific reasons for this.
Brexit, and the uncertainty it created, has generally weighed on British stocks in recent years, and this continues to be the case. But there was also the outbreak of Covid-19 that saw the index fall from just above 7,500 to some distance below.
The FTSE 100 has largely recovered over the past year. In fact, it has been one of the best performers globally. This is partly because the index had a lower starting point than many others around the world, but it’s also been pulled upwards by mining and oil stocks that soared during the first half of the year.
Improving investor sentiment
The UK index passed 7,500 during trading on Monday despite negative economic forecasts over the past week. Last week Bank of England Governor Andrew Bailey forecast the longest economic downturn since the 2008 financial crash. But the market has continued to push upwards.
Personally, I see there being several reasons for this.
Firstly, we’re coming to the end of earnings season. And during earnings season, we saw many companies outperform their forecasts, including major banks like Lloyds and other financial institutions such as Hargreaves Lansdown.
But, also, throughout the course of the year, investors, like myself, have been increasingly looking for value. And, for me, there are few places for finding value like the Footsie. The index is filled with undervalued stocks like Lloyds, Barclays, and Persimmon — all of which would make great additions to my portfolio.
There’s also the matter of the exchange rate. Yes, a depreciating pound can push up costs, but it also means that revenues earned overseas appear inflated when converted back into GBP. Companies in the FTSE 100 derive approximately 75% of their revenues from overseas. This pushes up earnings and makes valuations look more attractive.
The exchange rate also has another impact. As a UK-based investor, for me, the US markets are almost uninvestible right now. In the long run, I contend that the value of the pound will appreciate, and therefore, if I bought a US stock today, and the pound appreciated 10% over three years, it would wipe 10% off the value of my investment in GBP terms.
It also means that UK stocks look cheaper to investors with dollars. If I was an investor with a portfolio in dollars, I’d be buying UK stocks right now.
