6 reasons the FTSE 100 hit a new record high this week

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Perhaps most surprisingly, it comes despite heightened volatility in global stock markets, most notably in the AI-related shares listed mainly in the US and Asia.

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Here are six reasons why the UK has become the go-to safe haven for nervous investors.

1. Low technology weighting

The UK stock market is behaving exactly as you would expect an anti-AI or ‘old economy’ index to.

The sell-off in technology stocks has seen the Nasdaq index in America fall by 10% from its peak on 2 June. Japan’s Nikkei 225 is 14% below its 22 June peak. Korea’s Kospi index has lost a third of its value since the same date.

That is because they are heavily exposed to the small group of companies that drove markets higher in the first six months of the year but which have run up against investor scepticism about the sustainability of the AI boom.

The Korean market is dominated by chip makers Samsung and SK Hynix, which slumped this week after disappointing investors. Taiwan is heavily influenced by another chip maker TSMC. Until Apple regained its crown this week, Nvidia was the US’s biggest company.

The UK, by contrast has very little technology exposure. According to my colleague Jemma Slingo, technology represents just 2% of the FTSE 100 versus almost 40% for the S&P 500.

2. Rising oil price

Renewed tensions in the Middle East have pushed the oil price higher, which for most markets is viewed mainly as a driver of inflation and, as such, a negative influence on interest rates and growth.

While this is also true in the UK, the impact is mitigated by the FTSE 100’s big exposure to oil companies. BP and Shell account for roughly a tenth of the value of the UK’s benchmark.

The two stocks are 10% and 5% higher, respectively, since the start of March. At their peak they were more than 25% and 15% up.

3. Other commodity exposure

The FTSE 100 is also heavily exposed to non-oil commodity stocks like Rio Tinto, Glencore, Anglo American and Antofagasta.

Commodity prices have been strong, supported by Chinese stimulus expectations and concerns about global supply.

Commodities provide another source of earnings that has nothing to do with the AI boom.

4. Resilience to higher bond yields

Rising interest rates negatively impact the valuation of growth companies so fears that the Federal Reserve may raise rates two or three times over the next year or so provide a headwind for tech stocks.

Higher borrowing costs are much less of a problem - even a positive - for the banks which make up another big part of the UK index.

HSBC, Barclays, Standard Chartered, Lloyds and NatWest all stand to benefit from wider lending margins and stronger net interest income.

5. Cheap valuation

The FTSE 100 remains at a significant valuation discount to the US on the key metrics. It offers investors both a lower price/earnings ratio and a higher dividend yield.

According to Goldman Sachs, the FTSE 100 trades at 12.5 times expected earnings compared to 20.1 times for the S&P 500.

The UK benchmark’s average dividend yield is 3.5% versus 1.4% in America.

6. Political stability

While it is too early to tell how markets will judge the new government under Andy Burnham, it is fair to say that the initial response has been favourable.

Although he has only been Prime Minister since 20 July, markets have been pretty certain that he would succeed Sir Keir Starmer since he won the Makerfield by-election on 18 June.

Since then, the 10-year government bond yield (a key measure of the market’s view of the government’s fiscal prudence) has fluctuated between 4.7% and 5.1%. It stood at 4.75% the day before the by-election and is 4.99% at the time of writing.

It should be remembered that government bond yields are also influenced heavily by global factors such as geo-political uncertainty and inflation expectations.

Since the by-election, the FTSE 100 has risen by 3.4%.

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Past performance is not a reliable indicator of future returns

Source: LSEG, total returns in GBP terms from 30.6.21 to 30.6.26. Excludes initial charge.

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