Under normal circumstances the FTSE 100’s unprecedented string of record closes might have sparked a chorus of concern that the index is overbought and about to suffer a correction.
But as the pound’s plunge shows no sign of slowing – especially ahead of Prime Minister Theresa May’s speech scheduled for Tuesday — there seems to be an emerging consensus among most forecasters that for the rallying blue chip index the only way is still up.
More than two weeks into the New Year, the FTSE 100 has yet to suffer a session of losses in 2017. It’s notched up 14 consecutive days of gains, extending its remarkable rally since the June 23 Brexit vote.
Its upsurge is a mirror image of the pound's plunge.
Because of sterling’s nose since since the Brexit referendum, the income that internationally-exposed companies generate overseas becomes worth more when brought back home. Effectively it means an instant boost to the sterling earnings power of the UK’s biggest companies.
Around three-quarters of FTSE 100 revenue is generated abroad.
And the expectation is for more sterling weakness.
Dennis Jose, a European equity strategist at Barclays, forecasts the index hitting 7,600 by the end of 2017. It’s currently around 7,333 and it was below 5,800 a year ago.
Mr Jose says that “a combination of a weak sterling, recovering commodity prices and robust growth in global economies” will likely lead to earnings growth in the index of around 10 per cent.
He says that although Brexit negotiations, and a potential triggering of Article 50, will undoubtedly cause episodes of volatility, that’s “unlikely to cause a severe recession in the UK economy”, which could lead to a major sell-off in stocks.
In any case, he predicts that the impact on earnings of a weaker pound “should supersede a slowdown in the domestic economy, given the international nature of the FTSE 100 index.”
Mr Jose’s not alone with his forecast.
“With Theresa May’s speech on Tuesday, the risk is that we will see yet another ‘hard Brexit comment’ rock sterling, providing the FTSE with another leg higher,” says Joshua Mahony, a market analyst at IG. “The dramatic devaluation of the pound is unlikely to be over,” he adds.
James Illsley, an equity fund manager at JP Morgan Asset Management, names three reasons why the FTSE 100 could rise this year.
Firstly, the FTSE 100 still offers and attractive dividend yield compared to other asset classes, secondly, the sterling boost for internationally-exposed companies, and finally, the improved global economic backdrop which he says “continues to support the FTSE’s global exposure.”
“In particular commodities have seen a sharp recovery in their pricing and prospects, with this sector accounting for nearly a quarter of the FTSE100,” Mr Illsley says.
“When we look at the UK, the economic data has surprised to the upside with its resilience since the vote [and] the domestic economy still continues to do well in general,” he adds.
But there are some forecasters who take a slightly more cautious approach, at least in the longer term.
Nick Nelson, head of European equity strategy at UBS, says that based on a calculation that takes into account the predicted earnings of the FTSE 100 over the next 12 months and where shares in the individual companies are currently trading, they're starting to look “quite expensive”.
Where the FTSE 100 is currently trading already “bakes in” much of a weak currency and the resultant earnings boost that’s expected to materialise, he says.
He predicts that by the end of the year, the index could actually be lower than it is now.
But he also acknowledges the scope for surprise.
“The question, of course, is how much the currency can fall,” he says. “The more the pound falls, the more the index could overshoot our forecast.”
