The UK’s leading blue-chip stock index, the FTSE 100, is trading just below its all-time high of 7,877.5 printed back in May. It’s currently trading approximately 6% below this high watermark.
The FTSE 100 first broke through the fundamentally important 7,000 level at the beginning of 2015. Market uncertainty then caused it to fall to less than 6,000 at the beginning of 2016. However, by the end of the year, the index had broken to a new all-time high above 7,000. Since then, a buoyant global economy has helped support share prices and pushed the FTSE 100 higher.
I believe this rally is far from over. As investors continue to pile in, the bull market could take the FTSE 100 above 10,000.
The road to 10,000
A target of 10,000 for the FTSE 100 might seem like an unreal expectation, but it’s pretty easy to see how the index gets there.
Despite the fact that the index is trading close to its all-time high today, many of its largest and most recognisable constituents are trading at depressed levels.
HSBC, for example, is the FTSE 100’s largest constituent, accounting for 7.2% of the index. Year-to-date, the stock has underperformed the index by 8.7%, excluding dividends. British American Tobacco, which has an index weight of 4.4%, has underperformed by 31%, excluding dividends, over the past two years. Vodafone, with an index weight of 2.5%, has declined by a similar amount.
And the declines don’t stop there. Other companies such as Imperial Brands, Barclays, National Grid and United Utilities have all underperformed by a double-digit percentage over the past two years.
As these companies have underperformed, the oil and mining sectors have helped pick up the slack. At the same time, the market has been given a lift from the fall in the value of the pound, which is boosting the overseas earnings of many firms. Global economic growth is also helping companies with foreign exposure (around two-thirds of the FTSE 100 profits are generated outside the UK).
Global growth
As long as the global economic recovery continues, the FTSE 100 should be able to continue its record bull run — even in the event of a hard Brexit.
Indeed, a hard Brexit would likely cause the value of the pound to slump, which would further boost overseas earnings for FTSE 100 constituents. In this situation, companies would be able to benefit from a double tailwind of revenue growth from economic expansion, and earnings growth from a better exchange rate.
If the UK does agree on a deal with the European Union, then I can see the share prices of UK-centric businesses, which have taken a battering in recent years due to the uncertainty surrounding negotiations, rising. If sterling strengthens following an agreement, this might put the lid on gains, although renewed investor confidence in the UK may offset the negative impact.
So overall, it looks as if the FTSE 100 can keep rising from here. A target of 10,000 might be unobtainable in the near-term, but over the next few years I reckon this goal is indeed possible in the right conditions.
