The FTSE 100 is flying – even though the UK is in a mess (Image: Getty)
London’s benchmark FTSE 100 index is now within a whisker of the 11,000 mark for the first time ever, as the world wakes up to just how cheap British shares have become. For years, Wall Street has dominated thanks to tech giants such as Amazon, Apple, Google, Microsoft and Elon Musk’s SpaceX. Chipmaker Nvidia is valued at a staggering £3.4 trillion, making it worth more than the entire FTSE 100, whose combined value is around £2.7 trillion. Yet now the FTSE is fighting back. And pension, stocks, and Shares ISA investors are reaping the rewards.
For years, London looked old-fashioned, packed with banks, insurers, oil companies, miners and pharmaceutical firms rather than glamorous US tech stocks. Yet as investors fear the artificial intelligence boom has turned into a bubble, yesterday’s weakness suddenly looks like today’s strength. Higher oil prices have lifted BP and Shell, along with mining giants Rio Tinto, Glencore, Anglo American and Antofagasta. Britain’s heavyweight banks, Barclays, Lloyds, NatWest and HSBC have benefited too, as higher interest rates boost lending margins and profits.
Low valuations are another pull. Tom Stevenson, investment director at Fidelity, said: “The FTSE 100 continues to trade at a substantial valuation discount to the US market while offering investors a significantly higher dividend yield.” Britain’s resilient stock market has shrugged off political turmoil in Westminster. Around three-quarters of FTSE 100 earnings are generated overseas, making many companies less dependent on the UK economy. They actually benefit when the pound weakens, because overseas profits are worth more once converted back into sterling.
Yet many UK pension and Stocks and Shares ISA investors may be kicking themselves. Research from investment platform IG found that almost one in four cut their exposure to UK shares as political uncertainty mounted. Chris Beauchamp, chief market analyst at IG, said the supposedly “boring” FTSE 100 now looks beautiful thanks to strength in oil, precious metals and dividend stocks, combined with growing concerns over US tech.
Susannah Streeter, head of money and markets at Hargreaves Lansdown, said investors are being drawn to London’s defensive qualities in a volatile world. “They are returning to companies with dependable earnings, healthy cash flows and reliable dividends rather than betting everything on future AI profits.”
Strong results from blue-chip names including BAE Systems, Lloyds, Reckitt Benckiser, Rolls-Royce and Unilever have added to confidence. Streeter added: “Mining shares, defence companies, banks and energy groups have all benefited from a world where geopolitical tensions remain high.” Yet war in Iran could still trigger a meltdown.
Yet Britain’s stock market remains under threat as overseas predators continue to snap up undervalued companies. Budget airline easyJet has attracted interest from US private equity bidders. Richard Stone, chief executive of the Association of Investment Companies, said that too many undervalued UK businesses are falling into overseas hands and called for bolder government action. “We need to save our stock market.”
Investors tempted by Britain’s revival could consider adding a UK fund to their pension or ISA.
The FTF ClearBridge UK Equity Income Fund offers exposure to many of Britain’s biggest dividend-paying companies. Fidelity Special Situations hunts for undervalued businesses, while Liontrust UK Growth focuses on higher-quality companies with stronger long-term growth potential.
Those looking to keep costs down could choose a tracker instead. The iShares Core FTSE 100 UCITS ETF tracks Britain’s biggest companies, while the Vanguard FTSE 250 UCITS ETF offers exposure to medium-sized firms that could benefit if confidence in the UK economy continues to recover.
The FTSE 100 won’t beat Wall Street every year. As ever, diversification is vital. But after years in America’s shadow, Britain’s unfashionable stock market is reminding investors that boring can be beautiful.