FTSE 100 hits record highs – why is it rising and will we see more gains?

The FTSE 100 hit a record high this week in a boost for investors backing UK equities 

The UK’s blue-chip stock index rose to 8,474.41 on Wednesday and has grown around 10% so far in 2024.

It comes as many analysts have described the UK stock market as undervalued, especially as it doesn’t benefit from the current technology trends seen by the popularity of the Magnificent 7 in the US.

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It does, however, have plenty of top shares and established brands such as oil companies, banks and miners that pay a solid dividend.

“People have been saying it’s good value for some time, but previously what it lacked was a catalyst to change the prevailing negative sentiment and reverse the flows out of UK assets that had been depressing share prices,” says Rob Morgan, chief investment analyst at Charles Stanley 

“Gradually things have turned. Helpfully, the performance of the UK economy has perked up – to the surprise of many commentators. It’s still not great, perhaps, but it’s definitely significantly better than feared, and that’s helped boost investor sentiment towards the UK as a whole.”

So is now the time to buy British stocks or have investors missed the boat?

Why is the FTSE 100 rising?

Morgan highlights that he big international earners in the FTSE 100 have benefited from strength in the US dollar, which increases their earnings when measured in pounds, and overall company results have been pleasing. 

This has driven dividend payouts to shareholders and fuelled share buybacks, which boosts valuations.

Ben Seager-Scott, chief investment officer at Mazars, says the UK had been left behind on the global equity rebound and more US-focused technology boom but investors now seem to be catching up on the discounts its equities offer.

“It seems investors are once again thinking about valuations and the positive prospects for UK companies, either because they are global companies that are trading attractively or because they have exposure to the UK economy which seems to have emerged from recession,” he says.

There are also signs of more merger and acquisition activity which is boosting the index, such as miner BHP planning a £31 billion takeover of rival Anglo American.

Is now a good time to back the UK stock market?

Record highs tend to produce more record highs, says Chris Beauchamp, chief market analyst at IG Group.

But he warns that the short-term the valuation gap has closed to an extent, and more good news is now priced in.

“Charging in now when the index has rallied 12% from the lows of February might not be the best plan from a short-term performance perspective, he adds.

 “What is remarkable is that even now some quality firms trade on undemanding price-to-earning ratios, some even in single digits. Banks, miners and oil firms populate the list, almost all of whom pay out solid dividends, making them still worth considering.”

Seager-Scott adds that while most people instinctively believe in a form of mean reversion – that what goes up must come down – it’s worth remembering that markets tend to grow over time.

“If anything it is valuations and fundamentals such as earnings growth that tend to mean revert, whilst prices generally trend upwards. 

“With that in mind, despite the recent positive moves, the UK equity market continues to look attractively valued and there’s every reason to think the market can keep on performing.”

But context is important and Lisa Johnstone, chartered financial planner for VWM Wealth, says the FTSE 100 has barely moved over the past 20 years.

“Many of the traditional companies within the FTSE are those that pay a generous dividend, but the old fashioned label is hurting the index,” she says.

“Many firms are publicly looking at delisting and going to the US instead. In an increasingly globalised world the FTSE 100 a small index of 100 companies just doesn’t have the presence it once did.

“From an investor perspective the last five years of the FTSE 100 and last few months are a textbook example of the importance of a globally diversified portfolio which over the last few years would have served any investor better than speculating in this one small index. 

"It is a very different index to the US markets and therefore important to include as a diversifier; diversification across all global markets is likely to be the best strategy for growth overall."

Laith Khalaf, head of investment analysis at AJ Bell, agrees that UK investors shouldn’t get carried away by one month of strong performance 

He highlights that the FTSE is still lagging the S&P 500 and other European indices as well as Tokyo's main index, while other UK markets such as the FTSE 250 are still 14% below their peak.

“The rise in the Footsie has been part of a global risk rally over the last month, and while it’s pleasing to see the UK near the top of the leaderboard for a change, a rising tide has been lifting all boats,” adds Khalaf.

“One swallow doesn’t make a summer, and the UK still has significant ground to make up on international peers to regain some ballast in the global stock market.”