Stocks soar as sterling slumps
Stock markets in the UK soared yesterday, with the FTSE100 closing at 7,074.34, its highest level since the record finish of 7,104 in April 2015. Indeed, it came close to setting a new record high, before a last-minute burst of profit taking. Meanwhile, the FTSE 250 mid-cap index did close at a new peak.
This rapid rise - the FTSE100 closed below 6,000 on 27 June – is down to several factors, including the slump in sterling, Bank of England measures and improved economic data.
Sterling fell to a new 31-year low against the dollar yesterday. The pound dropped to its worst level since June 1985, falling by 0.9% to $1.2721. Against the euro, sterling hit a three-year low of €1.1365, down 0.8%. This was fuelled by growing fears that the UK could leave the single market after Brexit.
Obviously, the fall in sterling helps UK companies with significant overseas business, hence the rise in the FTSE100. Oil and gas companies also saw their stocks rise, with OPEC’s re-introduction of production caps, whilst mining shares have benefited from the broad rise in commodity prices.
The Bank of England’s cut in interest rates to 0.25% plus the extension of quantitative easing (QE) also helps stimulate the economy for both households and businesses.
Finally, despite the gloom and doom predictions of ‘project fear’, the economy seems to be in good shape still, with a strong performance by the UK’s services sector in September. The services sector accounts for about 75% of the economy and beat City expectations with buoyant new order books and a rise in employment. Markit, which compiled the figures, said the strength of the recovery meant there was little chance now chances of a UK recession in the second half of 2016.
The International Monetary Fund (IMF) has also backtracked on its gloomy post-Brexit forecast for the UK, and now states that the UK is likely to be the fastest growing major economy in 2016. The IMF now expects the UK economy to grow by 1.8% in 2016, higher than its July forecast of 1.7%.
From an investor’s viewpoint, reaching 7,000 is good news but it is in reality just passing a psychological barrier. However, it does show that equities are still an attractive proposition, particularly at a time of record low interest rates. The reality is that we are likely to see some volatility from this latest peak, particularly as there are a couple of years of uncertainty ahead before the UK’s relationship with the EU is resolved.
The key thing to remember that investing is a long game. At its launch back in January 1984, the FTSE100 started at 1,000. It has therefore grown in value by seven times in the last 32 years, despite much volatility along the way, suggesting once again that time in the market is better than trying to time the market.
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