London’s benchmark FTSE 100 index closed at new all-time highs of 7,560.35p on Friday, after an eventful week for investors and economists alike. Oil majors BP and Royal Dutch Shell set the tone, with their share prices closing in on five-year highs after a resurgent oil price had helped both companies beat analysts’ expectations in their third-quarter results.
A busy week
On Thursday it was the turn of the Bank of England (BoE) to hit the spotlight, raising interest rates for the first time in a decade. The official rate was hiked by 0.25% to 0.5%, the first increase since July 2007, when Labour was still in power, and Gordon Brown was Prime Minister. It’s expected that further rises will follow in the coming years, but the impact on the economy remains to be seen.
The news didn’t go down too well with the currency markets however, with the Great British Pound tumbling to near five-month lows following Thursday’s BoE announcement. The week was capped off with positive economic news from the all-important UK services sector, which in October grew by the fastest rate in six months, and helped the pound regain a little of the lost ground from Thursday.
Buy more shares
This flurry of news helped London’s blue-chip FTSE 100 index hit record highs by Friday’s close, and investors will be wondering whether it’s time to take profits and run for the hills before the full impact of Brexit hits the markets. I would do no such thing. In fact there may be opportunities to buy more shares in the coming months and years.
You see, I’ve never really been a fan of the FTSE 100. It’s a great idea to have a benchmark to give the general public an idea of how the markets are performing, but its relevance is over-exaggerated in my view. The index represents the top 100 UK listed companies by market value, equivalent to over 80% of the entire market capitalisation of the London Stock Exchange.
Not a bellwether
But the FTSE 100 is weighted by market capitalisation, meaning that just a handful of banks, oil majors, mining and pharmaceuticals companies dominate it. This weighting makes it less indicative of the market as a whole, taking into account that there are around 2,000 companies listed on the Stock Exchange if you include the Alternative Investment Market (AIM), where the likes of ASOS and Boohoo.Com trade.
The FTSE 100 is also mistakenly used as a barometer for the UK economy. As the current record-breaking levels show, the Footsie has performed well since the Brexit vote even though the economy hasn’t. The reason for this is that many of the larger UK listed companies generate the majority of their revenue overseas, which will more than offset any weakness Brexit may bring to the domestic economy. To many, the mid-cap FTSE 250 index is perhaps a better bellwether for the UK economy, with its more locally-focused companies.
In my view, the rise and rise of the FTSE 100 shouldn’t dissuade investors from continuing to buy shares in quality companies trading at sensible valuations. Believe me, there are still some bargains to be had, even with the index now in previously uncharted territory.
