The American economist, Paul Samuelson, once noted: “Investing should be more like watching paint dry or watching grass grow. If you want excitement, take $800 and go to Las Vegas”.
It is sound advice, as investing is often best served by a patient and calm approach. Yet, it is hard not to get a little bit excited when stock markets soar and there is a possibility of significant returns on your investments.
The FTSE 100, one of the UK’s major stock indices, has surged in recent months and repeatedly hit new record highs, providing a reason to be positive despite recent worries about the greater economy, global energy crisis, and the cost of living.
According to Proactive Investors, the index rose past 8,000 points for the first time in February 2023, setting a new all-time record, despite concerns that the UK is on the verge of a recession.
As the greater UK economy continues to struggle, it might be difficult for potential investors to understand why the markets are seemingly performing so well.
Read on to learn about four factors that are driving the FTSE 100’s strong performance.
1. The FTSE 100 offers shareholders an opportunity for sizeable dividends
A considerable number of the companies that make up the FTSE 100 typically pay dividends, making them an attractive proposition to investors looking to generate income.
According to the Guardian, the FTSE 100 is forecast to return £85.8 billion in dividends to shareholders this year, seeing a year-on-year increase of £6.7 billion and setting a new record high. This trend is expected to continue into 2023 and 2024, as detailed in the chart below:
Source: the Guardian
The FTSE 100 has also been boosted by share buybacks, in which firms use spare capital to acquire and cancel their own shares. Major energy corporations — such as BP and Shell — have recently announced billions in share buybacks, effectively returning cash to investors.
2. The FTSE 100 is largely made up of traditional businesses in industries including major banks and businesses in the defence sector
The FTSE 100 contains many corporations in the banking and defence sectors, which have thrived in recent times, largely due to the cost of living crisis and ongoing war in Ukraine.
According to SimplyWallSt, over the last three years the earnings for companies in the Aerospace and Defence industry have grown 13% each year, largely due to strong performances from Rolls-Royce and BAE systems — one of the UK’s key fighter jet manufacturers.
Rising interest rates in the UK have benefited banks, who have received similar boosts from cost of living crises across the globe. The greater the demand for credit, and the higher interest rates go, the more likely banking stocks will rise.
Banking stocks form a major part of the UK index, so have helped drive the FTSE 100 to hit record highs, while also contributing to it’s most recent dip. According to Financial Times, problems within the US bond market and an emergency capital raise by Silicon Valley Bank led to a large sell-off in US banking stocks, which has had ramifications for global banks listed in the FTSE 100.
3. The FTSE 100 has been fuelled by the global energy crisis
Aside from big banks and defence contractors, the FTSE 100 contains several major oil and gas corporations, such as Shell, BP, and Centrica (the owner of British Gas).
The invasion of Ukraine by Russian forces in early 2022 sent oil and gas prices to skyrocket and has fuelled a global energy crisis that has mounted pressure on many UK households, now facing escalating energy bills.
As shortages cause supplies to dwindle, demand conversely increases, which has pushed energy stocks upwards.
According to the Guardian, there has been a 60% increase in the value of shares in Shell and BP since the start of 2022 as both firms reported record profits.
Although crude oil and gas prices have begun to fall in recent months, they are still historically high. Energy firms are expected to continue to post bumper profits and despite calls for harsher windfall taxes on major oil and gas suppliers, the rates still remain relatively low.
4. The FTSE is made up of corporations that do business across the globe and have actually benefited from a weak pound
The FTSE 100 is largely made up of multinational corporations whose sales and profits are drawn from markets across the globe.
In fact, according to Investment Week, companies on the FTSE 100 receive approximately 75% of their revenues from overseas. This can insulate the index from sharp falls in the value of more UK-focused businesses such as Ocado and Cineworld, both having seen difficult starts to 2023.
Global factors can see the largest internationally listed corporations’ respective values soar or conversely dip, as seen March 2023 with the banking sector.
The foreign exchange market can also influence FTSE earnings, particularly fluctuations in the value of the pound. Over the last year, the pound has depreciated against other major currencies — such as the US dollar and euro — and a weak pound can actually benefit the FTSE 100’s performance.
A falling sterling can be beneficial for internationally focused firms as their overseas revenues are able to purchase more when they are exchanged back into sterling.
It can also benefits UK businesses that rely heavily on exports, as cheaper British goods become more attractive to foreign buyers. Many major corporations listed on the FTSE 100 also declare their dividends in dollars, which can be boosted by favourable exchange rates.
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UK markets are performing well, and the outlook for the greater economy looks positive, as inflation is believed to have peaked, the base rate is expected to rise no further than 4.5%, and the long-looming recession might still be avoided.
It offers a positive landscape for investors and opportunities to develop your portfolio further. If you are interested in learning how, please email us at helpme@aspirellp.co.uk or call 0117 9303510.
Please note
This article is no substitute for financial advice and should not be treated as such. To determine the best course of action for your individual circumstances, please contact us.
Investments carry risk. The value of your investments (and any income from them) can go down as well as up and you may not get back the full amount you invested. Investments should be considered over the longer term and should fit in with your overall attitude to risk and financial circumstances.
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