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Why is the FTSE 100 performing so well?

Why is the FTSE 100 performing so well?
The FTSE 100 delivered a positive return in 2022, even as the MSCI World Index lost around 13 per cent. (FT Montage)

The FTSE 100 reaching near all-time highs at a time of double digit inflation, anaemic economic growth and sharply negative consumer sentiment seems counter intuitive, but the latest dawn may prove to be a false one, according to several professional investors. 

Around three-quarters of the earnings of the UK’s large-cap index come from overseas, meaning the index generally performs in a way not especially linked to the performance of the domestic economy. 

The FTSE 100 actually delivered a positive return in 2022, even as the MSCI World Index lost around 13 per cent. 

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Darius McDermott, who advises on the VT Chelsea range of multi-manager funds, says: “2022 was a good year for the UK’s largest companies. While almost every other major stock market experienced declines, the FTSE 100 rose 4.7 per cent over the calendar year.

"The big drivers of performance in the FTSE 100 have been the mega caps – the 20 or so very largest companies in our stock market."

He adds: "These companies, particularly those in the healthcare and the oil and energy sectors, have benefitted from being global businesses and dollar earners – so when the dollar has appreciated against the pound it has been to their advantage.

"AstraZeneca, for example, has seen its stock price rise by more than 30 per cent over the past 12 months, while the likes of Shell, BP, Rio Tinto, and Glencore are up 49 per cent, 50 per cent, 32 per cent and 57 per cent respectively.”

As all commodities such as oil and steel are priced in dollars wherever in the world they are traded, and when the dollar is strong against sterling, this means the value of the dividends paid by commodity companies in sterling rises. 

Those sectors performed well on other global markets as well, but it is the FTSE 100 that has a relatively larger exposure to areas such as banks and oil companies.  

Richard Saldanha, a global equity income fund manager at Aviva Investors, says that while the composition of the index has helped the FTSE of late, he is cautious on the outlook for the UK market because the very trends that have helped it may be receding. 

He says the market is starting to believe that inflation globally may have peaked, and therefore that interest rates may not rise to the levels previously expected, and this has led to generally improved investor sentiment in both bond and equity markets.

The fund manager adds that the re-opening of the Chinese economy has also contributed to the improved sentiment. 

But Saldanha notes "if the market is right and inflation has peaked, then it is likely that the sectors which are a big part of the FTSE 100 and which do relatively better in times of higher interest rates, such as banks and commodity companies, would be expected to do less well. The oil price has already fallen from its highs”.