On Wednesday, February 15th, the FTSE 100 reached 8,000 points for the first time in its almost 40-year history. The FTSE 100 is a U.K. index that includes the largest 100 companies by market capitalization listed on the London Stock Exchange.
That same Wednesday inflation data had been released, showing that price increases were slowing, even if inflation still remained near a forty-year high. The annual inflation rate fell for a third consecutive month, reaching 10.1% in January, while the market expected 10.3%. For previous months the figure had been 10.5% in December, 10.7% in November, and 11.1% in October, which marked the cycle's peak.
The good inflation news increased the odds that the Bank of England would not raise rates beyond what is currently projected. Moreover, the inflation report came amid other macroeconomic good news, namely the reopening of China, declining energy costs in Europe, and receding recession fears, both in the U.K. and abroad.
Until Thursday, the FTSE had returned 6.6% year to date, including dividends, although it closed below 8,000 points. The FTSE 100 had already surprised in 2022, gaining almost 0.9% and returning 4.7% with dividends included. This turned it into the best performing major index of the year, while the most important U.S. indices and the Euro Stoxx 50 posted considerable losses. The FTSE 100 has come a long way since March of 2020, when it plunged below 5,000 points, hitting an eight-year low. That quarter alone the leading U.K. index lost almost 25%.
The FTSE 100 has also derived some advantages from its composition. First, it is dominated by multinational companies, which obtain most of their revenues from foreign markets—approximately 75%. This helps to explain the fact that the index rose on a day where the dollar, as measured by the Dollar Index, was strengthening following the news of stronger-than-expected retail sales in the United States (up 3% in January with respect to December). Furthermore, the index does not rely heavily on tech firms. Additionally, it features many companies that generate strong cash flows, especially in sectors like energy, financials, and basic materials. High prices for commodities, for example, have benefitted oil and mining U.K. firms, like BP and Shell. Value stocks have attracted investors’ attention as interest rates have steadily increased in the last year. What’s more, dividends from firms in the FTSE 100 are forecast to reach a record in 2023.
Glossary:
The FTSE 100 is a share index of the 100 companies listed on the London Stock Exchange with the highest market capitalization.
The Harmonized Index of Consumer Prices (HICP) is used to measure consumer price inflation. That means the change over time in the prices of consumer goods and services purchased by euro area households. It is “harmonized” because all the countries in the European Union follow the same methodology. This ensures that the data for one country can be compared with the data for another. (Source: European Central Bank.)
The US CPI for All Urban Consumers (CPI-U) provides a monthly measure of US inflation although its coverage is notably different from the HICP methodology. (Source: Office for National Statistics, U.K.)
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