Hooray! FTSE 100 Reaches All Time High

By Bob Huxford

After the relentless economic doom and gloom in the press, finally something we can cheer about. The FTSE 100 reached an all-time high last week.

Given that stock markets are forward-looking and based on expectations that must mean the economic situation in the UK is set to get better, right?

Well, probably not.

The FTSE 100 are the biggest 100 companies to have listed on the London Stock Exchange. They’re not necessarily British companies and, although most of them are British, they don’t necessarily make their money in the UK. In fact, a full 82% of the revenues of FTSE 100 constituents come from overseas, so their success certainly doesn’t reflect the state of the UK economy.

However, that’s not to say the fortunes of the UK economy don’t influence the FTSE 100. A notable feature of strength in the FTSE 100 is the value of sterling. When sterling falls the FTSE 100 tends to rise. In part, that’s because when money made overseas is translated to sterling for the purposes of reporting results, the numbers come in higher, valuations in relation to the numbers look cheaper and investors move in on the bargain share prices, pushing them up.

Although lower sterling can benefit companies in making exports cheaper, a lower pound is a direct consequence of the rest of the world seeing the UK as that bit less valuable. The pound saw a number of falls in 2022 due to the Bank of England’s interventions on interest rates. This remedial action might normally be expected to increase the value of sterling, but from the outside the UK has typically been seen as doing too little too late to rein in inflation.

A key reason for the UK’s tardy response to inflation is that so much of the nation's wealth is dependent on UK property prices. 50% of our banking system’s net assets are secured against property and so there has been a persistent fear that raising interest rates too quickly will cause a house price crash, the ripple effects from which could exponentially exacerbate our financial woes. Current consensus, however, is that we are heading for a downturn in house prices during 2023 and 2024, with most estimates ranging between 5% (Zoopla) and 15% (Nomura), which won’t help spark an economic recovery.

There are other reasons for the FTSE 100’s strong performance as well. A large chunk of the index (a full 13.5%) relates to oil & gas stocks, which recorded record profits as a result of last year’s supply disruptions at the expense of the UK consumer. This is a situation that is expected to worsen for the consumer, as government support for energy costs is withdrawn. Large international companies have also been better shielded from the effects of covid, the war in Ukraine, and Brexit, all of which continue to take their toll on the UK economy. In addition, larger stocks tend to outperform smaller ones ahead of recessionary periods, as they are viewed as a safer haven for investors' money.

Given the above, it could be argued that the success of the FTSE 100 is directly inverse to the health of the UK economy. As such, the FTSE’s success could be seen as a harbinger of worse times ahead, or at the very least continuing bad times. So last week’s new high is really nothing to celebrate.

Of course, it’s not necessarily all bad news. If you’re an investor in the FTSE 100 it’s a good thing. And if you have a pension, a fair chunk of it is probably invested in our largest, and theoretically safest, listed companies. Also, if the FTSE 100 is a hedge against an economic downturn, it may be worth putting a bit of money in there as protection, assuming you have any left that is.