LONDON, Feb 4 (Reuters): Britain's blue-chip FTSE 100 index hit a record high on Friday, in what could mark a potential turning point for UK assets, which have been dogged by a floundering economy.
Hopes that inflation is abating globally have driven flows into global stocks. But with data and company earnings holding up better than anticipated and a reopening in China boosting commodity stocks, fears that the UK economic outlook would hold London stocks back have eased.
"You get the great big behemoths on the FTSE 100 who pay whopping big dividends and they have the armour to deal with a recession. A lot of these are in defensive positions where they're actually going to do quite well in a recession," Danni Hewson, AJ Bell financial analyst, said.
"Also, the reopening of China will lead to huge demand for commodities, so you're going to see commodity stocks up and that's going to really help UK equities."
The rise in the index on Friday was partly down to a drop in the pound against the dollar, which soared after strong US jobs data.
"The other thing that is boosting the FTSE is the weaker pound, the FTSE is made of a lot of multinational firms and that means they get their money from abroad, which means when we see a weakening in the pound, it is going to boost the FTSE 100," said Fiona Cincotta, senior financial markets analyst at City Index.
The Bank of England, meanwhile, raised rates for the tenth consecutive time since late 2021 on Thursday, and to their highest since 2008, but signalled it is nearing the end of its tightening cycle. The Federal Reserve also hiked the bank rate this week and indicated US rates may have further to increase, meaning more strength for the dollar.
The FTSE 100 rose to 7,906.58 at 1545 GMT, surpassing a previous record high of 7,903.50 hit on May 22 2018.
However, the stark reality for UK companies is that Britain is facing what is expected to be the worst recession among major economies this year, even though the BOE this week signalled it is slowly turning the tide on sky-high inflation.
"Is it realistic that the FTSE being at an all-time high when we consider the state of the UK economy? The answer is probably not but the FTSE is so international it's not really reflective of the UK economy. The FTSE 250 is more reflective of the UK economy," City Index's Cincotta said.
The impact of the weaker currency was evident from the performance of blue-chip stocks on Friday versus midcaps.
The FTSE 100 closed Friday up 1.04 per cent higher and has rallied 4.9 per cent so far this year. The domestically-focused FTSE 250, which contains smaller- to middle-sized companies, closed 0.1 per cent lower on Friday.
London's stock index has risen in recent months in line with a global rally in equities as inflation pressures abate, as well as gains in commodity focused stocks.
Europe's broad STOXX index is trading near its highest level since last April. The FTSE 100 is up around 21 per cent from roughly 1-1/2 year lows hit in October.
"Of course, there is still a risk this lift in spirits may be short-lived," Susannah Streeter, senior investment and markets analyst at Hargreaves Lansdown.
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