FTSE 100 closes in on 11,000

As I write, the FTSE 100 continues its stealthy march towards the 11,000-point milestone, a level it previously almost reached at the end of February. That rally was stopped in its tracks as conflict erupted in the Middle East between the US and Iran. Yet with investors taking a more sanguine view of the disruption and renewed interest in stock markets offering better value, the FTSE has increasingly been turning heads.

FTSE 100 climbs towards 11,000 

The UK index breaking new highs may not make much sense on first inspection. With gloomy economic headlines, political manoeuvrings, and cuts to interest rates from the Bank of England on pause, investors could be forgiven for steering clear of the market.

But keep in mind that the UK stock market index is not the same as the UK economy. It is truly international. A large majority – more than three quarters – of FTSE 100 company earnings come from overseas. And what’s more, some of the most favourable trends in the UK market are obscured from view. The index lacks the fashionable technology companies of the AI revolution, and it has struggled to keep up with the US market over the past decade. Yet it has been an engine of consistent dividend generation that harnesses global growth trends in energy, finance, mining and healthcare. So, upon closer inspection, the UK index’s strength isn’t so surprising.

FTSE 100 latest trends

Many of the UK’s heavyweight companies listed on the London Stock Exchange are energy and commodity powerhouses that have benefited from buoyant prices. Meanwhile, global banks and pharmaceutical giants typically ply their trade on the international stage rather than being reliant on domestic conditions. 

Mining stocks have gained over the past year from robust demand for commodities such as copper and gold, while energy majors have been supported by firmer oil prices and ongoing geopolitical uncertainty. Financial stocks have also delivered strong earnings, and defence and industrial stocks have emerged as winners. Rising global defence spending and strong corporate earnings have boosted major names such as Rolls-Royce.

Investors have also been attracted by the relatively low valuations among UK equities. Following years of trading at a discount to overseas peers, London-listed stocks have drawn renewed interest from global investors seeking value. Corporate activity, including takeovers, share buybacks and special dividends, has further reinforced the view that many UK companies remain undervalued, but potentially not forever. 

This merger and acquisition (M&A) activity creates a halo effect, not just bumping up the value of the target shares but reinvigorating interest in affected sectors and the market more broadly. On the one hand, while M&A appetite is often for the more bite-sized, smaller companies, it still highlights the overall attractiveness of UK assets. But on the other hand, it is very worrying for the health of the UK market and broader economy that fewer companies are being quoted in London as a result. As far as investors are concerned, the trend at least illustrates that further gains are possible if it continues.

Another source of support has been the FTSE 100's reputation as a dividend market. Large payouts from banks, healthcare companies and energy giants continue to appeal to investors seeking income and typically more stable returns, particularly during periods of increased market uncertainty. On top of dividends, UK businesses are executing a high level of share buybacks. These involve using earnings to reduce the share count, which when carried out at an attractive valuation can magnify shareholder returns.

What could stop the rally?

Although there is scope for further gains in UK equities given low valuations, there are always risks to consider.

In the near term, the global economic outlook continues to be shaped by events in the Middle East. There are presently significant concerns around the exceptionally low level of oil inventories amid renewed conflict and disruption. Higher energy prices could push up inflation, causing central banks to raise interest rates and put the brakes on growth.

Perceptions around the UK’s political and economic stability could also return to the spotlight. Markets have so far reacted calmly to the arrival of Andy Burnham as prime minister, content that an orderly transition of power and a renewed commitment to fiscal rules will keep things on an even keel. However, there could be ramifications for all UK assets – shares, gilts and the pound – should there be more destabilising trends.

Find out more: How to invest in the FTSE 100

What are the UK’s main stock market indices?

FTSE 100 – also known as the Financial Times Stock Exchange 100 Index, it measures the performance of the largest 100 UK stock market-listed companies by size or ‘market capitalisation’.

FTSE 250 – represents the next largest 250 companies listed on the London Stock Exchange and is often referred to as the ‘mid-cap’ index. The medium-sized company index and smaller company indices are more domestically orientated. These have had a tougher time, although arguably offer even more long-term opportunity given low valuations versus history and equivalent markets globally.

FTSE 350 –  the combination of the FTSE 100 and FTSE 250.

FTSE All Share – the combination of FTSE 100, FTSE 250 and FTSE SmallCap indices.