After staying just below the 7,000 mark at close for days, the FTSE 100 index finally broke the barrier this week. Of the four trading days this week, the index is set to close above 7,000 for three of them this Friday evening.
This is an important level because it signifies that the index has finally moved past the pandemic now. The last time it averaged above 7,000 was in the third week of February 2020. That is, over 14 months ago.
There are plenty of reasons why this has happened.
FTSE 100 gets an economy boost
Forecasts on the economy just turned super-positive. In its monetary policy meeting earlier this week, the Bank of England (BoE) said that the UK will grow at its fastest pace since the Second World War this year.
There is a heavy base effect here, meaning that the contraction last year statistically makes the increase appear bigger now. Even so, optimism coming from the central bank itself says something. There are already signs of economic expansion. A recent survey indicates that the UK’s manufacturing activity just grew by its fastest pace since 1994.
Improving conditions for banks
At the same time, interest rates are still unchanged. Arguably, they will rise over the course of 2021 as inflation inches up. But for now, the BoE is watching the trend, not acting on it.
So in effect, what we have is improving economic conditions coupled with loans available on easy terms. Just last week, we saw a spate of better-than-expected banking results. These included Lloyds Bank, HSBC, and Barclays, which sharply reduced provisions for bad loans.
This is an encouraging sign for credit growth as well. I would imagine banks are happier to lend at lower rates when they are likely to be safe in doing so. In other words, we could well see more loan growth.
Real estate supports the FTSE 100 index
A trend of low interest rates is also closely correlated with the property markets. Mortgage loans have been in high demand and going by policy support like the stamp duty relaxation, I reckon it will continue for the next few months.
It is little surprise then that the FTSE 100 property developer Barratt Developments posted a positive trading update earlier this week, following a strong one by Persimmon as well.
What happens next
Considering the possible future direction of the index is a big part of my top-down investing strategy. Going by these trends, I think it is quite likely that the FTSE 100 rally will continue. Of course, there is also the risk of inflation.
Companies Mondi, DS Smith, and Smurfit Kappa Group have recently warned of rising paper prices, which increases input costs. The International Consolidated Airlines Group has also touched upon rising energy costs at an already difficult time for aviation.
But until inflation really gets out of hand, I think the index is in a good place. Big oil companies like BP and Royal Dutch Shell are beneficiaries from higher prices, as are a slew of big miners like BHP, Anglo American, Rio Tinto and Glencore, all of which are part of the FTSE 100 index. Because I think the index can stay strong in 2021, I’ll be buying more FTSE 100 stocks.
