EquitiesMay 29 2013

Opinion: Why the FTSE will waltz past the 7,000 mark

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The FTSE 100 emerged from the Bank Holiday weekend with one hell of a bang. Thursday’s sharp drop was a distant memory as the UK’s flagship index brushed aside any remaining concerns and carried on regardless.

Exceptionally strong house price and consumer confidence data from the United States will only feed the feel-good factor surrounding the FTSE. And on Tuesday it felt like we made another major step towards the symbolic 7,000 mark.

The FTSE 100 has now risen 15 per cent since the start of the year, and it’s a question of when, not if, it breaks through the 7,000 barrier during 2013.

Talk of more quantitative easing among European central bankers certainly did the index no harm on Tuesday, as markets like few things as much as easing. Accommodative monetary policies are a glass floor that the markets believe protect them from free fall. They are probably not wrong, either.

But it’s not really the hedge of additional money printing that is sending the FTSE up. We may not be on firm ground yet but few can deny that the UK economy has improved in recent weeks. Inflation has come down, Q1 growth has been reconfirmed and even the IMF has admitted that Plan A may not be sending the economy into the death spiral it once thought.

The UK economy is also being boosted by the combination of a weak pound and low interest rates and is well placed to benefit from the resurgent US. The irony, though, is that a strong economy is no longer a prerequisite for strong profits.

Knowing that top-line growth is a rarity these days, the UK’s blue chips have relentlessly attacked their cost base in order to sustain dividends. Just look at the UK banks, which have shed hundreds of thousands of jobs since 2008 to keep shareholders happy.

Indeed, despite the challenging economic backdrop of recent years, UK equities are looking increasingly attractive. Britain’s blue chips have adjusted to the weaker demand in the economy, repaired their balance sheets and restored their dividend-paying capability.

They have been helped by falling British labour costs due to wage stagnation and a slimmed-down workforce. Being much leaner has made Britain much meaner.

And don’t forget that the FTSE 100 is first and foremost defensive, certainly a lot more so than, say, the German stock exchange, which is much more exposed to China.