The UK’s benchmark share index, the FTSE 100, sailed through the 7000 barrier for the first time on Friday, March 20, 2015, and closed at just over 7022 – its highest level since the introduction of the blue-chip index in 1984.
It was only a few weeks ago that the FTSE 100 broke its previous intraday high of 6,950.6 – recorded on December 30, 1999, during the peak of the dotcom technology bubble. The past 15 or so years, therefore, have been particularly tough for those equity investors who entered the market at the previous highs.
Source: London Stock Exchange | Trading Economics
The recent bullish performance of the FTSE should not be attributed solely to contributory factors within the UK. Given that approximately 77% of the FTSE 100’s revenues are derived outside the UK (according to a November 2013 report by The Capital Group), it is arguably more accurate to analyse the behaviour of the index from an international perspective.
The new highs can partly be attributed to the current economic landscape in the UK and Europe. Both the UK’s Bank of England and the European Central Bank have created an environment for market growth by maintaining low interest rates in the long term, and the ECB has recently added a programme of quantitative easing to its expansionary monetary policy. Consequently, investors are moving out of bond markets, where yields have plummeted, and are turning their attention to equities. Furthermore, fears of a rise in US interest rates were allayed recently when Federal Reserve chief Janet Yellen indicated that rate hikes would follow a more modest path than the one previously alluded to by the Fed.
Market confidence was also given a shot in the arm following a European summit in mid-March, in which Greece’s eurozone creditors agreed to provide the economically beleaguered country with more funding – on the condition that the new Greek government prepare a comprehensive list of reforms proving its commitment to an austerity programme.
There is less of a fear that the market will experience a crash anytime soon, unlike during the technology boom of 1999. All three of the aforementioned economies – the UK, the US and the eurozone – are in modest growth phases. The US and UK in particular are forecast to experience sustained economic growth in the medium term, while eurozone economic data is also showing early signs of improvement. The pro-cyclical equity markets are therefore expected to be supported by this strong growth.
Given that the benchmark indices in Germany and Italy have risen by more than 20% in 2015 alone, however, the FTSE 100 has somewhat underperformed in comparison, recording a modest 7% growth for the year. According to data provider EFPR, $4.3bn has been added to German equity funds this year, while investors have pulled $2.2bn out of UK equity funds during the same period. The ECB’s quantitative easing programme can partially account for this discrepancy, but another major reason has been the underperformance of the oil and gas sector, which accounts for 15% of the FTSE 100 and which has been constrained by the global oil price slump.
Analysts have also attributed the FTSE 100’s comparatively conservative performance to uncertainty over the UK’s general election in May, which is expected to stimulate market volatility in the coming weeks.