Q: The FTSE has stabilised above 7,500 over the last week: Could we finally see FTSE 8,000 by the end of 2017?
At the time of writing, the FTSE 100 is only 480 points away from that target. Considering it took from December to May to get from 7,000 to 7,500, it isn’t beyond the realm of possibility that we could jump another 500 or so points in the next six months.
Although arguably the FTSE 100 is starting to look over-valued, first quarter earnings were strong, and we have also seen a global synchronisation in earnings data, which tends to bode well for global stock markets. On paper there are many risks, including the outcome of the UK election and the Brexit negotiations, but risky assets have been remarkably resilient in the face of political uncertainty. Unless we get a particularly shocking result when the votes come in later this week, then we don’t see political risk getting in the way of further FTSE gains.
We’re not expecting a riotous rally – more of a slow trot higher in the next six months or so.
The FTSE 100 has returned 26 per cent since February last year – that is an impressive performance. The market has moved upwards irrespective of risks, but nothing rises forever and markets do not go up in a straight line.
The rally in the FTSE 100 was driven by a rebound in commodity and oil prices followed by the collapse of the pound and was supported by better than expected economic data as the Brexit vote had no noticeable impact on the economy. But that is now all baked into the price, and after such a strong rally, valuations look expensive, while dividend cover is also low. The recovery in the commodity sector will not be repeated – now the risk is sterling rebounds driving down the FTSE 100.
The UK economy is showing signs of slowing – house prices and consumer spending have been weaker, while UK economic growth has been downgraded. Some foreign investors may find the UK cheap. But with Brexit negotiations looming, many will choose to wait.