As the FTSE-100 hits a record high, a blend of favourable economic conditions and strategic investment opportunities spark optimism in the UK financial markets

The United Kingdom’s premier stock index, the FTSE-100, has achieved a new record high, signalling a potential turnaround for a market that has long struggled with underperformance. This resurgence is driven by a confluence of improving economic indicators, strategic investment inflows, and a more favourable international valuation perspective.

Reaching a peak of 8,076.52, the FTSE-100’s ascent marks a significant milestone, surpassing its previous record from February 2023. This achievement has been underpinned by a 4% increase in the index this year, although it still trails behind the gains seen in other major European indexes like the STOXX 600, CAC 40, and DAX, which have recorded higher growth rates.

Historically, the FTSE-100 has faced challenges due to the uncertainty surrounding the UK’s economic prospects post-Brexit and its heavy weighting towards basic resources stocks, which missed out on the bull runs seen in sectors like AI and luxury goods that benefitted other markets. However, the recent shift in global economic dynamics, coupled with rising commodity prices and a depreciating pound, is drawing investors back to the UK market.

David Cumming, head of UK Equities at Newton Investment Management, noted that the UK market’s low valuations relative to its historical performance and other global markets, especially the US, have made it an attractive prospect for investors seeking value. “The catalyst would be the economic data in the UK is getting better; we are returning to growth,” Cumming explained.

The London stock market’s price-to-earnings ratio, which stands at less than 11 compared to 13 for the STOXX 600 and 20 for the S&P 500, underscores the market’s undervaluation. This has spurred political initiatives aimed at revitalizing the market, including proposals for new investment vehicles like a “UK ISA” to encourage domestic investments.

The broader rally in the FTSE-100 has been further supported by a diversification in the sectors contributing to its growth. Increased activity in commodities, aided by a weaker pound, has improved the profitability of overseas revenues, which constitute about 75% of the earnings for companies listed on the index. Energy sector gains, with oil prices climbing 13% this year, have also buoyed the index.

Further adding to the upbeat mood, Barclays’ head of European equity strategy, Emmanuel Cau, highlighted the recent performance improvements in various sectors. “The FTSE 100 has recently benefited from the broadening of the rally out of Big Tech, pick-up in commodities, and a more diversified sector composition,” said Cau.

Amid these positive developments, the UK market has also seen a flurry of mergers and acquisitions, particularly among mid-sized companies, reflecting heightened investor confidence and recognition of the market’s low valuations.

As the Bank of England is expected to cut interest rates more aggressively than the US Federal Reserve in 2024, the appeal of the UK as an investment destination is likely to increase, potentially sustaining the market’s growth trajectory.