Analysts believe the FTSE 100 is on course to reach 8,000 points for the first time in history after a strong week of gains for the large-cap index.
After posting a record close of 7,787 last Thursday the FTSE 100 index broke new ground again on Monday morning, reaching 7,847 – a new intra-day record.
The previous all-time high of the FTSE 100 came in January this year when it reached 7,778 points.
Chief market analyst at IG Group Chris Beauchamp believes the index could hit 8,000 points by the end of the year.
“8,000 is nothing at all really. From here it’s another 2 and a half per cent and we’ve rallied nearly 15 per cent since those lows at the end of March.
“Probably a lot of the easy work has been done. It could go down fairly quickly but I still think it’s a reasonable target, certainly for the rest of the year.”
Year-to-date performance of FTSE 100
Source: Bloomberg
The blue-chip index rallied thanks to the news this weekend that the potential US-China trade war that has been feared by the market is being postponed, with communications between the two parties continuing to develop.
Neil Wilson, chief markets analyst at Markets.com said: “It looks like progress on talks between China and the US means we are not about to descend into a punitive trade war.
“Whilst there is still a long way to go and nothing is agreed until everything is agreed, there has undoubtedly been solid progress and the sense of relief in equity markets is palpable.”
However, he added that the recent gains made by the FTSE 100 index are more likely due to a weaker sterling against a stronger dollar.
Indeed, companies in the large-cap indices tend to be more internationally-focused, with more of their revenue coming from overseas. Some such as Shell report their earnings and dividends in dollars meaning the currency is a particular boost.
AJ Bell’s investment director Russ Mould predicted that the index could hit 8,000 points this year.
“Without wishing to sound like smart-alec, our forecast for the FTSE 100 at the start of the year was for it to reach 8,000, and for the moment we will stick with that.”
Although the UK equity market has underlying issues with the likes of Brexit and uncertainty over the Bank of England’s monetary policy, Mould gives three reasons why the UK is attractive.
Firstly, he commented on the fact that the UK stock market has produced weaker sterling returns over 2016 and 2017 compared to other global markets.
Performance of FTSE 100 vs global indices over 2016 and 2017
Source: FE Analytics
“This is an instant red rag to contrarian bulls, who will also be intrigued by how UK equities continue to be shunned in the Bank of America Merrill Lynch fund manager survey, which continues to show hefty underweight positions as the preferred strategy amongst professional money managers and asset allocators.”
He added that because the UK market is unloved it is therefore also undervalued, with the index trading on around 14x consensus earnings estimates for 2018.
“In addition, there are a number of sectors – oils, retailers, real estate, house builders – which offer lowly valuations, attractive yields or both and therefore have the potential to surprise on the upside in 2018,” the investment director said.
Finally, the FTSE 100’s dividend yield of over 4 per cent is attractive, according to Mould, particularly in the low yield environment we have been in for much of the period since the financial crisis.
He said: “This beats cash and the 1.49 per cent yield offered by the benchmark 10-year Government bond, or Gilt, hands down. Such a yield could be a source of support for the index and chip in a healthy percentage of total returns from UK stocks in 2018.”
Chief executive of The Share Centre Richard Stone also sees the FTSE 100 breaking through the 8,000-point barrier before the end of the year, but he said in order to see any gains investors need to be comfortable with short-term volatility.
“Anyone who was invested in the market at the beginning of the year and saw their investments fall in value, but remained invested, has now ridden through that short-term volatility and has seen their investments recover as markets have gone above the levels they were at the start of 2018.
“Looking forward, following such a significant rise over the last couple of months, the market might be expected to take a pause, investors might welcome the opportunity to take some profits, and at least trade sideways and consolidate those gains for a period.”