Sky's Ian King explains why there is optimism in London, and elsewhere, on the outlook for equities but he says there are big reasons why the FTSE 100 can expect better things.
The new year is only three weeks old but already the FTSE 100, the best-known UK stock index, is already up by just under 5.5%.And it seems possible that, at some point in coming sessions, the Footsie will challenge the intra-day record high of 7,903.5 that it hit on 22 May 2018.The S&P 500, the most important of the big US stock indices, is up 4.4% so far this year and Japan's Nikkei 225 up by 4.2%.
The fact that the UK is unlikely to have fallen into recession in the second half of last year, contrary to the expectations of the Office for Budget Responsibility, among others, will also have lifted sentiment, even though it must always be remembered that the Footsie is a big global index and not especially focused on the UK economy.
Instead, the Footsie is teeming with big oil and mining companies, all of which benefitted last year on the back of rampant inflation following Russia's invasion of Ukraine. Pharmaceutical stocks are generally regarded along these lines and again, the Footsie has two big ones in AstraZeneca and GSK, respectively the first and tenth largest companies in the index - although there is a case for now saying AZ in particular deserves to be regarded as more than just a defensive stock.
A third factor is valuation. Along with many of its continental European peers, the FTSE-100 is comparatively cheaply rated when set against American counterparts using the most common yardstick, the price/earnings ratio. The Footsie is currently trading on a trailing PE ratio of 11.8 times - the historic average is around 15 times - compared with 14.3 for the DAX, 19.25 for the Dow Jones Industrial Average and 20 for the S&P 500.
Another way of looking at it is that, when listed in a cheap currency like sterling, big UK dollar earners represent a comparatively cheap way of buying into a flow of dollar earnings for US investors - especially in the case of those companies, like the oil majors, who pay their dividends in dollars.
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