Key Takeaways
- This week the UK’s FTSE 100 benchmark index has persistently broken through 9,000 points, albeit temporarily.
- The index has been buoyed by investors keen to shrug off the worst fallout from US President Donald Trump’s tariffs.
- The more domestically-oriented FTSE 250 remains below previous highs as macroeconomic headwinds hamper the UK economy.
The FTSE 100 is testing new levels, yet again, having bounced past the 9,000 points mark at the start of trading on July 18. It had previously first breached the 9,000 level, on an intraday basis, on July 15.
In the US, the S&P 500 and Nasdaq have also hit fresh highs, as earnings season gets into full swing.
In the UK, the index of leading stocks is benefiting from continued investor confidence about a steadily improving international outlook, despite Thursday’s jobs data showing UK unemployment is at a four year high.
Jonathan Unwin, UK head of portfolio management at Mirabaud Wealth Management, says: “The UK market has acted as something of a haven amid global trade uncertainty in recent months, thanks in part to the UK quickly striking a trade deal with the US. Expectations of UK rate cuts are further supporting rate-sensitive stocks, while the currency drag from dollar weakness has largely played out at this stage.”
Opportunities in the FTSE 250
Although the FTSE 100 is the star performer, the more domestically-focused FTSE 250 index of mid-cap stocks is not far behind.
According to Morningstar data, so far this year the FTSE 250 has notched up gains of 6.9%, while the FTSE 100 has posted a return of 11.6%. Over the most recent seven-day trading period, the gap is even closer. The FTSE 100 delivered a return of 0.67%, while the FTSE 250 realized a 0.16% gain.
“While the headline [FTSE 100] index grabs attention, savvy investors are also eyeing the FTSE 250, where quality stocks are trading at discount prices following five years of prices lagging the blue-chip stocks,” says Ben Russon, co-head of UK equities at Martin Currie.
“The UK economy is on the brink of a consumer-driven revival. Record household savings, rising real wages, and widely anticipated rate cuts are fueling optimism,” he adds.
The UK job market is cooling with the unemployment rate rising to 4.7%, its highest level in four years.
The Office for National Statistics also finds that the annual rate of pay growth over the past three months slowed to 5%.
But this environment could prime the Bank of England to lower rates in the near future.
“Of course, challenges persist—geopolitical risk, government fiscal constraints, and slightly elevated inflation remain—but the outlook is increasingly bright,” Martin Currie’s Russon adds.
The Stocks Leading the FSTE 100 Higher
For Dan Coatsworth, investment analyst at AJ Bell, it is important not to forget that the UK stock market is full of companies that are leaders in their respective fields.
“While the UK market lacks the kind of technology opportunities found in the US, it excels in other areas and investors are spoiled for choice in sectors such as financials, natural resources, healthcare and industrials.”
The financial services sector remains the leading contributor to the outperformance of the Morningstar UK Index. The sector returned 2.67% from July 7 to July 16.
British American Tobacco BATS leads the pack posting a return of 9.31% with a contribution of 0.28%. Year to date, its stock has returned 30.72% as its US sales have grown due to increased demand for its nicotine pouches.
HSBC HSBA follows suit reporting a return of 3.67% with a contribution of 0.25%. So far this year the stock has returned 18.15%.
Despite the UK stock market bull run, some stocks have fared worse than others. Shell’s SHEL share price has dropped 0.10% this morning as oil prices remain volatile. WPP is the leading detractor of the Morningstar UK index reporting a loss of 21.46% from July 7 to July 16.
Meanwhile, the homebuilding sector has shown signs of weakness.
“Barratt Redrow’s trading update highlighted weakness in the London property market and continued red tape and planning regulations being a hindrance to growth. It is also weighing on Persimmon and Berkeley Group. Overall, this is another sign that the UK government’s plans to boost growth are taking longer to implement than first hoped,” says Kathleen Brooks, research director at XTB.
What Is Morningstar’s View of the FTSE 100?
Michael Field, chief European markets strategist at Morningstar, argues that some investors might find the FTSE 100’s rally surprising, given the macroeconomic headwinds the UK economy is facing.
Yet in Morningstar’s Field’s view the UK stock market is being buoyed by a positive earnings season as well as tailwinds specific to the UK economy.
“Interest rates are at some of the highest levels in the Western world, so there’s a lot of scope for cutting interest rates over the next six months or so. Inflation in the UK is elevated now, but the effects are supposedly transitory, and they could fall quite markedly over the next few months,” he says.
“So, when you think about it from that perspective, the picture is quite positive for the UK. And it has that trade deal already with the US and a relatively stable government. It is not in a bad position relative to other markets now.”
He also adds that there is a big opportunity for investors to find alpha in European and UK small and mid-caps, which are trading at a discount. However, the decision by some fund managers to invest in UK large caps has paid off.
“We have been through some tough years. But the largest businesses, that happen to be listed in the UK, are just more resilient. They can issue debt more easily, they can borrow from banks more easily, and they have more resilient supply chains,” he says.
“A lot of smaller UK companies are just pure plays. They do just one thing and if that is not working then the business will not go well. Investors have been correct up to now to be more heavily invested in large caps, but whether that holds true as business conditions improve further is the question.”
Sunniva Kolostyak contributed to this story.
