BRITAIN’S FTSE 100 scaled fresh 4-1/2 year peaks yesterday, with signs of progress in US budget talks encouraging investors’ shift from low-yielding government bonds into higher risk, higher return equities.
US Republican leaders signalled they would allow the government to raise the debt ceiling and borrow to prevent a default in the next three months without demanding immediate spending cuts from President Barack Obama.
Britain, with a heavy dose of internationally-focused companies among its blue chips, was a key beneficiary of easing concerns about the US budget, together with recent signs of stronger economic growth there and in China.
The FTSE 100 closed up 26.57 points, or 0.4 per cent, at 6,180.98, its highest finish since mid-2008.
“There are clearly some political issues that face us in the near term ... (But) if you are an investor, equities are cheap against fixed income, that combined with an improving global environment means there are plenty of opportunities," said John Haynes, head of research at Investec Wealth and Investment, who recommends some industrial companies and strong brand names like Unilever and Diageo.
But the strong gains, which have put the FTSE 100 on track for its best month in half a year, have also taken it into overbought territory on the 7-day relative strength index (RSI), raising the risk of a correction or at least consolidation.
“If you look at stochastics and RSI, they are massively overbought so I am envisaging a correction in the fairly near future,” said Jack Pollard, of Sucden Financial.
“If we saw a correction to around the 5,977 area, it wouldn’t be a massive concern. If we then managed to hold that, I think people will start loading up on longs and we could move higher again into the end of the first quarter.”
Traditional “risk-on” sectors led the way on Monday with miners up 1.3 per cent.
Financials added their weight to gains too, with insurers bolstered by a 4.9 per cent rally to 1211p in Admiral Group after Goldman Sachs upgraded the firm to “buy” and added it to its conviction list.
Goldman Sachs analysts, led by Ravi Tanna, said the stock has the potential to return 30 per cent over the next year.
Analysts believe shares will be helped by proposals for legislative change in Britain, such as capping whiplash claims and limiting fees paid to “no win no fee” lawyers, and holding down costs and premiums.
“We believe there is potential for claims inflation to decline faster than the market expects,” Tanna wrote in the note. “As a result of renegotiated reinsurance terms, the group has significant gearing towards lower claims inflation.”
The outlook for earnings, however, remained a key concern, with Pearson the top faller among the blue chips after the education and media group reported a weak finish to 2012 and said it expects tough market conditions to continue.
Its share price fell 2.9 per cent to 1202p.
The Financial Times publisher now expects adjusted earnings per share of around 84p, down from the 84.9p it stated in October, with full-year operating profit of around £935m.
Pearson said cuts in government spending would continue to hold back its school publishing business in the UK and US, but its international division would report double digit sales growth due to the strong demand in emerging markets.
“Given the lack of earnings momentum and the current valuation – 14 times consensus 2013 earnings, which we believe will see downgrades as we go through the year – we would continue to take profits,” analysts at Killick said in a note.