The odds for the index, which recently hit a closing-high of 7562.28, are stacked in its favour on three separate factors according to the firm’s investment director Russ Mould; performance, valuation and dividend yield.
He said these three factors will play in the market’s favour despite ongoing Brexit-based uncertainty, a stuttering economy and heightened political risk.
The FTSE 100 has underperformed global stock markets’ total returns over the last two years, Mould said, something that will be a “red rag” to contrarian bulls.
The same bulls will also be “intrigued by the latest Bank of America Merrill Lynch fund manager survey which in November showed that 37% of respondents were underweight UK equities – the highest figure since the Great Financial Crisis,” Mould added.
On the second basis, valuation, Mould said the UK is also not expensive compared with its international peer, currently trading at around 14x the consensus on earnings estimates for 2018.
“There are a number of sectors such as oils, retailers, real estate and house builders which offer lowly valuations, attractive yields or both and therefore have the potential to surprise on the upside in 2018,” Mould said.
“This will be particularly the case if the pound confirms the sceptics by holding its ground – or making further gains – and dampens interest in the exporters and overseas assets plays which have largely dominated since the EU referendum.”
The dividend yield of the FTSE 100 stands at 4.3%, beating both cash yields and the 1.2% offered by 10-year government bonds.
“Such a yield could be a source of support for the index and contribute a healthy percentage of total returns from UK stocks in 2018. Granted, dividend cover is thinner than ideal, but the higher the oil price goes the safer the dividend yield from BP and Shell becomes and they represent nearly a fifth of total dividend payments between them,” Mould said.
He added: “Even if the UK fails to dash toward 8,000 there is a sense that stock and sector leadership are changing as 2017 draws to an end and investors may therefore need to be more wary of expensive-looking momentum plays or pricey quality names, for all of their undoubted attractions, and look at downtrodden, domestic plays which offer value, yield or a combination of the two.
“Such names have come to the fore in the past month or so and this rotation could have further to run if sterling holds its ground, global economic growth improves (removing the need to pay a premium for tech-style secular earnings increases as cyclical gains become more prevalent), and interest rates rise only slowly, to again reaffirm the UK’s yield attractions.”
