According to the IMF’s latest World Economic Outlook, growth in the UK is expected to come in at 1.8% in 2016 and 1.1% in 2017, down from 2.2% in 2015. This decline, the IMF said was on account of “Uncertainty following the “Brexit’’ referendum in June” which it expects “will take a toll on the confidence of investors”.
The IMF’s tone is unsurprising and a good representation of many market predictions of the path of economic growth from here. Granted, the UK is expected to have the strongest growth of any of its G7 peers through out the year, but, it does beg the question: If the prognosis is for lower growth from here, should investors really be celebrating the FTSE 100’s return through 7000?
And, it would seem, it is a question to which there are lots of caveats and few clear answers.
The first of those caveats is currency. As is evident from the graphs below, the persistent weakness in sterling that has been a feature of markets throughout the year but which has increased in intensity following the EU referendum in June has proved to be a massive tailwind to UK investors.
With in sterling terms, the FTSE 100 is up over 15.5%, in US dollar terms it is up less than 1% year-to-date, while the FTSE 250 is 7% lower. A performance that chimes much more closely to the growth outlook put forward by the IMF.
Trevor Green, head of UK equities at Aviva Investors pointed out, sterling has depreciated 15% between March 2015, which was the last time the FTSE 100 hit a record high and now.
In March 2015, he said, the rise was “about falling oil prices and optimism on the Eurozone recovery. This time, it materially revolves around currency.”
“Most importantly where equities are concerned, overseas earners benefit from the translation of these earnings back to sterling, leading to a succession of companies upgrading their earnings forecasts for currency alone. The top performers in the Index since the last time we hit 7000 include a multitude of big dollar earners, so we have seen Sage Group share price up 57%, British American Tobacco up 38% and Compass Group up 28% to name but a few.”
The second caveat is the nature of valuation itself in a world where bonds have been held at what are unnaturally low levels by monetary policy.