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Why the FTSE 100 is set for a new all-time high

The FTSE 100 has enjoyed a relatively prosperous year. It has risen over 6% and, when its dividends are added to the mix, its total return has been around 10%. This is above the expected return of large-cap shares of around 7% per annum.

During the last year, the index has reached a new record high of 7,547 points. Since hitting that level in May and again in August, it dropped back over the summer. Now, though, it has upward momentum and it could be about to deliver a new all-time high.

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Brexit woes

One factor in the FTSE 100 recording strong performance in the last year has been uncertainty surrounding Brexit. It has caused the pound to significantly weaken, which has been hugely beneficial for the companies listed on the UK’s main index. They are mostly international businesses and so they gain a positive currency adjustment when the pound is weak. This has helped to boost their profitability on a reported basis and means higher valuations can be more easily justified.

Looking ahead, problems associated with Brexit could increase. Negotiations do not appear to be progressing particularly quickly, judging by comments made in recent months. This means that a transitional period may be sought and this may even extend the period of uncertainty still further. While this could hurt the performance of UK-focused stocks, the net result on the FTSE 100 is likely to be positive. This may mean further gains for the index, which could help it to reach a new record high.

Sector performance

With 15% of the market capitalisation of the index being made up of oil and gas companies, the outlook for its performance could be positive. The oil price has risen from $46 per barrel in June to as much as $58 per barrel in the last week. This suggests that there is positive momentum after a period of supply cuts, and this may benefit the financial performance and valuations of the oil and gas explorers and producers in the index. Since they account for a large proportion of the index by market capitalisation, this could have a significant effect on its near-term outlook.

Likewise, the banking sector may also help the FTSE 100 to reach a new record high. It accounts for 13.5% of the index by market capitalisation, which makes it the second-biggest sector behind oil and gas. With interest rates in the UK forecast to increase in the short run, trading conditions for the banks may improve. This may lead to higher profits and improved investor sentiment.

Looking ahead

Clearly, the FTSE 100 trading close to its all-time high may lead some investors to consider it overvalued. However, with the potential for further Brexit uncertainty and improved performance from key sectors, the index looks set to deliver a new record high in the medium term.

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Peter Stephens has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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