There haven’t been that many things to celebrate over the past few months. However, one positive leads to another. With the relaxation of lockdown restrictions at the start of the week, we now end it with the FTSE 100 index passing 7,000 points. Looking at historical charts, the last time we hit this level was on 26 February last year. From her, I think the market can head higher for several reasons.
Sentiment and market weighting
I don’t think it’s a coincidence that the movement higher in the FTSE 100 over the past few weeks has been at a time when UK Covid-19 related cases and deaths has been decreasing. The reopening of the economy began this month, and so far has proceeded without any serious hiccups.
As much as the FTSE 100 index is a replication of the individual firms within it, the index does also trade as a gauge of how well the UK is doing. So the expectation of an open economy with low Covid-related issues is a positive. I think that’s a key reason why we’ve seen the index move higher and break 7,000. It’s also a reason as to why I think this move can be sustained into the summer and beyond.
A second reason that I think the FTSE 100 has room to go higher is because of the make-up of the companies within it. The index is weighted by market capitalisation, meaning that companies with the largest valuation carry the largest weight in the index.
Within the top 10 companies are pharmaceutical businesses GlaxoSmithKline and AstraZeneca. I expect both of these to grow this year due to vaccine initiatives. Also in the top 10 are BP and Royal Dutch Shell. These oil-related companies should benefit from forecasts by some that WTI and Brent prices could head back to the high $60’s per bbl.
Reallocating funds back to the FTSE 100
The final reason why I think the FTSE 100 can sustain a move higher is due to the inflows from foreign investors. Ever since Brexit in 2016, there has been a reluctance of foreign investors (private and institutional) to allocate money towards the FTSE 100 and other UK assets. The reduction in uncertainty has been helped by the Brexit deal late last year.Â
Therefore, I think we could see a slow-but-long-term move from asset managers and others buying back in to UK equities in general. This isn’t a direct cause of the pop to 7,000 points today. But I do think this will be behind a durable move higher in the FTSE 100 in coming years. After all, the FTSE 100 has still some way to go before it reaches all-time highs (in comparison to the NASDAQ and S&P indexes).
One risk to my overall view is that this move to 7,000 points could stutter if expectation differs from reality. The market is forward-looking, and so if we don’t see economic figures later this year showing sufficient growth, the index could swiftly reverse and head lower instead.
But I think there are plenty of reasons to be positive about the FTSE 100 and UK equities in general.