Business Bytes: The FTSE 100 is close to an all-time high – here’s why

THE FTSE 100 surged close to an all-time high yesterday, while the pound hit its lowest level against the dollar since 1985, but the index’s move above 7,000 is counter-intuitive given the economic backdrop.

The pound was down with investors concerned that the UK is heading towards a ‘hard’ Brexit that would restrict access to the EU’s single market, with markets lacking the reassurance they sought when Prime Minister Theresa May confirmed the timetable for triggering the Brexit process at the Conservative Party conference.

The FTSE 100 closed last night at 7,074, having peaked at 7,118 in intra-day trading, with only a late dip in the final five minutes preventing it from a record close.

It’s just 100 days since the stock market fell off a cliff in the aftermath of the EU referendum, but why is this happening?

The weaker pound is benefitting global companies

Despite the sterling weakening, the FTSE 100 is benefiting. That is because many of the companies that are within the FTSE 100 are international companies. Those who shares are traded in the UK, tend to benefit from a lower pound.

In fact, profits earned abroad by multinational companies and major mining companies are worth more when converted back into sterling, making a company’s shares appear better value when compared with the higher profits it will make. For a range of these companies, including drugs giant GlaxoSmithKline and Anglo American, the impact of the UK’s economy is a small impact in their overall performance.

Businesses such as Glencore, Fresnillo, BHP Billiton and Smiths Group have performed incredibly well since the Brexit vote. However, companies including Capita, EasyJet, Next, ITV and Royal Bank of Scotland have seen their shares drop dramatically in recent months.

FTSE Graph

Photo credit: Hargreaves Lansdown

Brexit hasn’t happened yet

All we have so far is a rough estimation of when the UK will begin exiting the EU, with Prime Minister Theresa May saying that Article 50 will be triggered during March 2017. So far, we are still unaware of how tariffs will work once we have left the EU and how the economy will function without a single market.

Shares are an attractive option

Interest rates are at 0.5%, therefore, leaving money in the bank isn’t generating any return. Alongside that, company shares do not look overvalued compared with historical price to earnings ratios.

Laith Khalaf, senior analyst at Hargreaves Lansdown, explained how shares aren’t actually too expensive at the moment. He said: “If you compare share prices to company earnings, the valuation of the UK stock market is actually somewhere in the middle of its historic range, neither particularly cheap, nor dear, at current prices.

“This is in stark contrast to the former peak of the market in 1999, when the price-earnings ratio of the UK stock market stood at an eye-watering level.”

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