“Dedication, that’s what you need, if you want to be a record breaker,” sang the TV entertainer Roy Castle on the long-running BBC programme dedicated to notable feats.
London’s FTSE 100 has been on a dedicated record-breaking run all of its own, notching up an unprecedented 14 consecutive sessions of gains by the end of last week, a run which only ended on Monday, when the index slipped back but not before setting a fresh intraday record in early trade.
The main London benchmark, dominated by large multinational companies, has outperformed its European peers during the run, reflecting the weakness in the pound against those of its major trading partners, the US dollar, euro and yen. For the ranks of London-listed companies which book revenues in foreign currency, the sliding pound represents an upgrade in their earnings power, while also making exports more competitive.
“The FTSE 100 is in a bit of a sweet spot internationally, and not just because of domestic factors,” says Richard Hunter, head of research at Wilson King.
“The dangers faced by markets in the US and Europe are more complicated and less well defined than the potential Brexit pressures that are front and centre in the UK and will be for a while.”
The political calendar’s potential influence over the exchange rate remains paramount. Potential hazards for the pound and broader UK markets include the upcoming ruling from the Supreme Court on the extent of parliamentary scrutiny over the government’s Brexit plans and a speech from Theresa May on Europe scheduled for Tuesday.
Also, when adjusted for dollar-based investors, the performance of the FTSE 100 shows a loss of 6 per cent since the Brexit vote result, while the benchmark sits a quarter below its 2014 dollar-denominated record high.
With currency traders anticipating further weakness in the pound, via the options market, over the coming months as the risk of a hard Brexit looms, investors bullish on UK blue-chips face a host of considerations.
The prospect of firmer metals prices favours the FTSE with its heavy weighting towards mining and resource companies, including oil majors BP and Royal Dutch Shell, which have been among the best performers of late.
Saxo Bank forecasts “further upside” not least from the prospect of stronger world economic growth, and says metals prices remain 24 per cent below their average since March 2009, even after a 34 per cent rally from the bottom of the market, hit in early 2016.
Other sectors, however, face a test, starting with the oil majors.
“The currency effect is now looking less positive for international oil companies,” says Frances Hudson, global thematic strategist at Standard Life Investments.
“Much of it is already priced in, and after rising oil prices, they are looking to increase investment on hopes for continued tight supply. We would look to other parts of the energy sector to catch up with the valuation rebound for the majors. The names here are probably more European, the likes of Saipem and Technip, even though they don’t have as much currency uplift.”
High dividend paying defensive stocks also look vulnerable should we see a further rise in bond yields, while the more domestically focused blue-chips face the downside of a cheaper pound in the form of higher costs from imported components.
Against that backdrop the question is whether the FTSE 100’s recent run represents the start of a fundamental shift that helps the benchmark catch up with the stronger performance of its global rivals since the start of the century. At around 7,326, the FTSE 100 is barely above its dotcom record level and has underperformed the S&P 500 since its millennium-era peak.
James Illsley, portfolio manager of JPMorgan’s UK Equity Core Fund, also points out that “if you look at dividend yields, they have not materially changed since 1990 at around 4 per cent. This means UK assets have yet to re-rate in 30 years.”
Against that valuation argument, challenges beckon led by the current earnings season, with attention focused on the FTSE 100 stocks more directly exposed to the UK economy.
“Numbers from housebuilders and the rest of the December sales figures from retailers will be particularly important,” says Wilson King’s Mr Hunter.
“UK earnings season will peak before the end of January, and there will be eyes out for pockets of underperformance, or signs of slower consumer spending. That will be a theme into 2017, which is still likely to be a tougher time for the UK economy.”
There could also be more tension between FTSE 100 constituents grappling with the impact on their businesses of the low pound and worries about consumer spending.
Ms Hudson highlights the pricing dispute between consumer goods maker Unilever and Tesco, the UK’s biggest retailer, best remembered for the popular sandwich spread Marmite being withdrawn briefly from sale via Tesco’s website.
“Returning inflation could create tension between food producers and retailers. Supermarkets had a good end to last year, but as higher prices feed through, if they can’t pass them on, as seems likely, the Marmite story could spread,” she adds.
Still, investors remaining dedicated to buying the FTSE 100 could well find that it is the place to be in 2017. While a rebound in sterling remains the main risk, the uncertainty of Brexit looks set to keep the lid on the pound, leaving the London index with what can appear to be a chance to catch up after a longer-term period of relative underperformance since it last broke records.
