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Will the ‘love affair’ with the UK stock market last?

With the FTSE 100 hitting another new all-time high, we take a closer look at what’s driving the rise and what could be next.

Important notes

This article isn’t personal advice. If you’re not sure whether an investment is right for you please seek advice. If you choose to invest the value of your investment will rise and fall, so you could get back less than you put in.

This article is more than 6 months old

It was correct at the time of publishing. Our views and any references to tax, investment and pension rules may have changed since then.

The FTSE 100 has got its mojo back after a difficult period when investors appeared to have fallen out of love with UK stocks. The FTSE 100 reached record highs at the start of February, after years when it seemed to be the wallflower among global indices.

But what’s leading the charge and how long could it last?

This article isn’t personal advice. If you’re not sure what’s right for you, ask for financial advice. Past performance isn’t a guide to future returns. All investments can fall as well as rise in value, so you could get back less than you invest.

What’s leading the charge?

The make-up of the index, heavily weighted towards commodity giants like mining and energy companies, utilities, banks and large consumer goods names has been particularly attractive since the start of the year. Many companies listed operate globally. That means they aren’t as sensitive to the fortunes of the UK economy, so even though a recession is set to roll in, they’re more insulated.

Confidence has also rebounded as investors eye up China’s reopening. This has helped commodity stocks amid expectations that demand will surge.

The ever-present shift to renewables will require huge resources of metals and minerals, which investors hope will provide longer term demand. This has been accelerated partly due to the conflict in Ukraine, as nations wean themselves off Russian energy.

Banks have been buoyed by the march upwards of interest rates, with the rate hiking cycle not yet forecast to be at an end. The current base interest rate in the UK is at 4% and it’s still expected to keep climbing.

Bank of England raises interest rates to 4% – what it means for savings rates and annuities

Brand pulling power of consumer goods giants has enabled them to pass on input price rises to consumers, helping to preserve margins.

Pent-up demand for travel has been translating into a surge in bookings for airlines. The gradual return of the high-spending consumers from across Asia is adding more shine to luxury goods companies.

The limited tech showing in the index, is for now, proving more of a short-term benefit, given how sensitive big US tech names have been to rising interest rates and worries about economic downturns.

When will US interest rates fall in 2023?

The surge in buying which pushed the FTSE 100 to a new all-time high came partly as the dollar gained strength. This was on expectations that interest rates will be increased again in the US due to the strong labour market. That means the overseas earnings of multinational companies listed on the index will be worth more when exchanged for pounds.

Of course, there’s still a risk this crush could be short lived.

Why worry is still in the air

There are still worries which could erupt about ebbing consumer resilience in the months to come on both sides of the Atlantic. US banks have set aside some hefty sums to cover the potential for bad debt to escalate if a recession rolls in.

Concerns are also lingering about what effect the continued ramp up in interest rates will have on global growth, especially if the US heads for a harder landing.

Britain might have avoided dipping into a recession in 2022. However, one is still forecast this year, with the IMF warning that the UK could be the laggard among the G7.

How to invest in a recession

With the UK housing market set to turn from a quiver to a shiver as painful rate rises start to hit, consumer confidence, which has been inching up, could start to seep away again.

Shoppers might baulk at swallowing yet more painful price rises, which could still hit consumer discretionary stocks listed on the FTSE 100. Some companies have already warned of some uncertain months ahead.

The silver lining

The Bank of England is still forecasting a recession but expects that it won’t be as long or deep as it feared in the autumn. Inflation is predicted to fall more quickly in many nations around the world which have been sideswiped by punishing price spirals.

Rate cuts are also expected to emerge across developing economies later this year, which could help demand.

That’s all helping the FTSE 100 keep more of a spring in its step, for now.

Investment themes in 2023 – what to watch

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    Important notes

    This article isn’t personal advice. If you’re not sure whether an investment is right for you please seek advice. If you choose to invest the value of your investment will rise and fall, so you could get back less than you put in.

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