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Ten reasons the FTSE 100 could hit 10,000 this year
Note: This is marketing material. This article is not investment advice, capital is at risk.
Ten reasons the FTSE 100 gets to 10,000 by Christmas
Best of times, worst of times: The FTSE was a safe harbour in a stormy market earlier this year and since everything has started grinding up the UK blue chips have not missed out. The FTSE 100 hit a fresh intraday record high today, led by miners and financials. So, there are dynamics at play here that make the FTSE attractive for a variety of reasons, which may explain why it could reach 10k this year.
- Diversification: Some modest ongoing diversification away from US leadership, particularly a heavy overweight tech position, has been a factor behind the FTSE’s ascent this year and can continue as US economic policy uncertainty remains elevated and investors seek some relative shelter from their USD exposure that is implicit with buying US stocks.
- Valuation: Sky high valuations in the US don’t lead to a bear market – recessions do. So it’s too easy to say that the UK is attractive from a valuation perspective. But this has been a strong argument for a while and is starting to be evidenced as the key bull thesis for UK stocks. (it has been before, but crucially the macro environment has changed). The FTSE 100 trades about 14.3x earnings – to get to 10,000 only requires a modest uplift to 15x. Meanwhile the S&P 500 trades about 22.6x earnings. Relative valuations have started to matter again due to macroeconomic conditions and higher terminal rates. The old TINATA - there is no alternative to America – trade is no longer quite as easy as it once was.
- Yield: The FTSE’s dividend yield is also the highest in developed markets. Investors may be tempted increasingly towards dividend strategies going forward.
- Composition: Index makeup matters - defensives, longer-term plays, companies that are not being disrupted by tech (eg miners and defence, drinks, tobacco). Old fashioned stuff like free cash flow and balance sheets have mattered once more.
- The majority of the FTSE’s earnings are from cyclical and value sectors – a positive when inflationary environment. All the things that held the UK index back in the 2010s are reversing into the more bullish ‘Roaring 20s’. The decade of low growth and low rates/inflation has been replaced by a far more dynamic, higher rate, higher inflation, higher nominal growth environment.
- UK weakness. Ok hear me out. The absolute chaos in the UK fiscal position could be a positive for the FTSE 100 because gilts and sterling are set to come under pressure, which will make the index look better and more appealing. The interesting thing is that we’ve nearly hit 9,500 as sterling has seen a big rally against the dollar this year – magnifying the relative performance vs the US.
- Bonfire of the Vanities: November 5th could see further uncertainty as the Supreme Court, which begins its new term on Monday, considers whether tariffs are legal. This Bonfire of the Vanities could be important for how the world sees US exceptionalism against Trump’s economic policymaking. Does this see Trump unravel like Sherman McCoy? My bet is the Supreme Court backs Trump and he has even more power to impose his will on the economy and markets.
- On a macro-to-micro level, I still want to look at the 4D trade – debt debasement & dollar devaluation is a factor favouring the FTSE, I think, due to the composition of basic resources stocks – i.e. miners. There is likely more in the gold trade long-term, even if we see near-term pullbacks and consolidation just shy of the $4k/oz level. Energy transition, AI and other megatrends should support miners.
- Defence: There is little sign that investor appetite for defence stocks is waning after a big rally this year. Russian pressure on Nato continues and the paradigm shift in defence spending across Europe remains a tailwind, particularly as we start to see where the defence pounds end up.
- Pharma: the recent jump in AstraZeneca and others following Pfizer’s deal with the US administration is a sign that the worst of the tariff-related uncertainty may be over. This can be a good tailwind for the index.