Personal investors in seventh heaven as FTSE 100 reaches record high

Richard Stone, Chief Executive at The Share Centre, comments on what the FTSE 100 rise could mean for investors:

“Today, the FTSE 100 has soared over 7,000 and is pushing all-time highs. In April 2015 it briefly touched 7,123 during trading and its highest close previously has been 7,104.

“Following personal investors’ fears that a vote for Brexit could have a damaging impact on their investments, the opposite has in fact occurred. The fall in the value of Sterling, a further loosening of monetary policy and a signal from the new government that fiscal policy will be relaxed, and have all served to send equities higher. Indeed, following the Brexit vote on Monday 27 June the FTSE100 closed below 6,000 and it is now over 18% above that level.

“The market has been driven by the fall in Sterling which boosts the Sterling value of earnings companies gain from overseas. For companies in the FTSE100, some three quarters of their revenues are not earned in Sterling so are now worth more in Sterling terms. This makes their profits higher in Sterling and therefore their value in Sterling terms also increases.

“This is not just about large multinational companies in the FTSE100 though. The more UK-focused FTSE250 has also seen strong gains and set record highs as those UK based companies that export will find demand increases for their products overseas as those products now appear to be cheaper. Similarly, it is now cheaper for tourists to visit the UK as their foreign currency buys more Pounds, and for UK travellers it is more expensive to go abroad increasing the attractiveness of ‘staycations’. This should serve to boost the UK tourism industry with knock on effects on the high street and service sector more broadly. These effects have been seen in strong bounce backs in the services and manufacturing Purchasing Managers Indexes (PMIs) which give an indication of demand in those respective parts of the economy.

“Finally, the oil price has also seen a rally of late. This has also helped support the valuations of those large oil and gas companies in the FTSE100.

“Personal investors need to be alert to changes in these circumstances though. The rally in Sterling at the start of September saw the market fall and if the higher valuations are not supported by higher earnings coming through then those valuations will fall back.

“Personal investors also need to keep a close eye on interest rates. The December meeting of the Federal Reserve in the US may decide to raise rates again. This would send the value of Sterling lower still against the dollar. In the UK the Bank of England Monetary Policy Committee lowered rates in August and has signalled it is likely to do so again before the end of the year. However, continued strong economic data and inflationary pressure from higher import and fuel prices may lead them to rethink that guidance and even potentially reverse the August cut. Any further cut could see Sterling weaken, while an increase in rates could see Sterling rise and equity prices fall back.

“Investors have had to become more used to volatile markets and they can create trading opportunities. The key lesson from the aftermath of the Brexit vote is that the doom and gloom associated with a possible exit may have been borne out in terms of the value of Sterling in international currency markets, but for investors that fall in Sterling along with other policy measures has helped drive resurgence in equity prices. Those investors who saw the buying opportunity in the aftermath of the Brexit vote along with those who simply held tight through that volatile period have been rewarded with handsome capital gains. While we await further indications of the UK’s Brexit negotiating position and see whether the market will consolidate its position above 7,000, setting and monitoring some limits to try and lock in some of those gains should the market suffer a setback could prove prudent.”