Britain’s FTSE 100 (INDEXFTSE: UKX) index was back on the march in end-of-week business and trading at 7,521 points at pixel time. Although up just 14 points on the day, this took the blue-chip index within a hair’s breadth of the record high of 7,547.6 points set back in May.
And there is plenty of reason to expect it to burst through the spring’s summit sooner rather than later. In the 18 months since the EU referendum, the index has leapt by a mighty 23%, and the same drivers that have fuelled investor appetite look set to persist long into the future.
Sterling sours
The vast international exposure of many FTSE 100 companies allows share pickers to overcome the political and economic headwinds battering the UK. And with the painful extraction from the EU likely to last many years rather than months, investors should continue to seek the safety of companies sourcing the lion’s share of their earnings from foreign shores.
These issues have also had a significant impact on the local currency, of course, providing businesses that report in sterling with a bottom-line boost. Indeed, the FTSE 100’s rise over the past few days has coincided with the pound’s slump as the Conservatives’ disastrous party conference cast more doubts over the future of PM Theresa May.
Sterling continues to trade at a significant discount to other major currencies since last summer’s EU vote (at 1.49 on the day of the referendum versus the US dollar compared with 1.30 now, and against the euro today’s reading of 1.11 is a significant discount to 1.30 on voting day).
And while a rate rise from the Bank of England may help to save sterling’s bacon, an increase late this year or in early 2018 is by no means certain considering the weakness of the UK economy, a point underlined by the patchy set of services, manufacturing and construction PMI data released earlier this week.
At the same time, signs of accelerating economic growth in the US and Europe, and the gradual tightening of monetary policy in these destinations, could provide another hammer blow to sterling in relation to its corresponding currencies.
Danger! Danger!
So while the omens look good for the FTSE 100 to keep on trucking, not all stocks are created equal, and there are a number of companies I would continue to avoid.
While commodities are, of course, a natural rush-to-safety asset given their wide variety of applications and solid demand in the global growth engines of Asia, I believe the vast material imbalances in many markets (from copper and oil to iron ore) is leaving many recent risers like Royal Dutch Shell and Rio Tinto looking a tad top heavy right now.
Having said that, I reckon precious metals miners like Randgold Resources and Fresnillo could prove sound investments as a broad catalogue of geopolitical tensions should keep gold and silver well bought.
Looking elsewhere, rising competitive pressures in the UK grocery market would also encourage me to steer clear of Tesco and Sainsbury’s, with industry gauges relentlessly confirming the stunning sales ascent of the disruptive discounters Aldi and Lidl.
And the rising regulatory attack on energy suppliers like Centrica and SSE to soothe the stress on household budgets — implementing energy price caps was a cornerstone of Theresa May’s speech this week — is making me steer clear of these stocks too.