FTSE stocks bounce back

(Image credit: SEAN GLADWELL)

The FTSE 100 market may be heading for success - here are the stocks to watch, according to experts.

“Britain’s stock market might finally be shaking off years of underperformance,” says Lucy Raitano on Reuters. The FTSE 100 has been left out of the “AI mania” gripping global markets, but enthusiasm over technology is starting to wane.

The UK’s blue-chip index made new record highs in May and is up by 7% so far this year, the same as the more domestically focused FTSE 250. London’s bias towards “old economy” sectors such as raw materials and banking have held it back in recent years, but that weakness is turning into a strength, says Bastien Bouchaud in Les Echos.

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Commodities are real assets and thus look attractive in a time of persistent inflation, while higher-for-longer interest rates will boost bank profits. Thanks to Shell and BP, energy accounts for roughly a fifth of all FTSE 100 profits. “A 10% rise in oil prices translates into a two percentage point rise in FTSE 100 profit growth,” says Lilia Peytavin of Goldman Sachs.

London has plenty of room to catch up: the FTSE 100 has gained 12.5% over the past five years, losing its position as Europe’s dominant market to France’s CAC 40, which is up 49% over the same period. The prolonged uncertainty following the 2016 Brexit referendum prompted investors to attach “a higher risk premium to UK equities”, Steve Magill of UBS Asset Management tells David Thorpe in FT Adviser.

Global investors thought that UK assets were risky, so they were only willing to buy them at a discount. Yet calmer political waters in Britain (and more turbulent ones overseas) mean that the Brexit risk premium now looks to have disappeared.

With an election date on the calendar, global fund managers are feeling increasingly positive about the UK, say Farah Elbahrawy and Naomi Tajitsu on Bloomberg. Investors appreciate certainty and there is little doubt about who will win the election; there is little difference between the two parties on macroeconomics in any case. UK stocks are paying twice the dividend available in many comparable markets, but “continue to trade near a record-low discount” to other developed markets.

How long will the FTSE 100 success last?

The FTSE 100 has done well recently, but the baton could yet pass to the mid and small caps of the FTSE 250. The pound has risen against most other large currencies this year. That’s a headwind for the profits of FTSE 100 multinationals (which make much of their money in foreign currency), but good news for smaller, domestic companies, which find that their money goes further.

Small and mid-caps are on big discounts to large caps, Rachel Winter of Killik & Co tells Christopher Johnson in Morningstar. In addition to a strong pound, they will also enjoy a boost from eventual interest-rate cuts and a (modestly) better outlook for the domestic economy. There looks to be “particular value” in UK “small and mid-cap opportunities”.

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Alex is an investment writer who has been contributing to MoneyWeek since 2015. He has been the magazine’s markets editor since 2019.

Alex has a passion for demystifying the often arcane world of finance for a general readership. While financial media tends to focus compulsively on the latest trend, the best opportunities can lie forgotten elsewhere.

He is especially interested in European equities – where his fluent French helps him to cover the continent’s largest bourse – and emerging markets, where his experience living in Beijing, and conversational Chinese, prove useful.

Hailing from Leeds, he studied Philosophy, Politics and Economics at the University of Oxford. He also holds a Master of Public Health from the University of Manchester.