Despite everything, the UK stock market keeps going up

Questor, The Telegraph’s investing column, takes a weekly view of the markets – what is moving them, what lies ahead and how all of this could affect your portfolios and financial goals.

The FTSE 100 is trying to surpass its all-time closing peak of 10,910, achieved on Feb 27 of this year, just before the war in the Middle East began, while the FTSE 250 is setting new lifetime highs.

Given the political and economic backdrop here in the UK, investors could be forgiven for wondering quite why this is, especially when so many analysts and commentators remain keen to dismiss the London stock market as a backwater.

The issue here, as ever, is that the bear case on any asset class always looks most compelling when the news is gloomiest. But that is also when valuations can be at their most attractive, and it is ultimately valuation, or the price paid for a security’s cash flows, that determines investment return, rather than narrative alone.

Bear hug

You can see why the bear case is so persuasive with even the scantest glance.

We are on our seventh Prime Minister in 10 years and our ninth Chancellor of the Exchequer. Such a record would embarrass any nation, so the political backdrop hardly smacks of stability.

Further from Westminster, the Government’s finances are a mess and government bond, or gilt, yields, stand at levels barely seen in 20 years as a result.

Over in the City, the data which emerge are no better. Inflation has met or exceeded the Bank of England’s 2pc target in every month except two since April 2021. That could maintain upward pressure on interest rates, and thus gilt yields, to the potential detriment of demand for credit, economic growth and share prices, to whom higher yields on cash and bonds represent competition for investors’ affections.

More companies continue to leave the London Stock Exchange than join it, while London also lacks exposure to the technology stocks that continue to lure investors toward the US and Asian stock markets.

And, of course, the war in the Middle East that knocked the FTSE 100 off course in spring is far from resolved.

Known unknowns

The list goes on, but in some ways that is the point. Yes, there is a lot of bad news about, but much of it is well known and if it is not new then it could already be factored into valuations and, if valuations are low, then it may not take much to prompt a reappraisal.

Even things getting less bad may be enough, let alone getting better, and there are some tangible arguments in favour of the London market.

Most tangibly, analysts expect the FTSE 100’s members to generate record profits, and pay out record dividends, in both 2026 and 2027.

Better still, they are also upgrading their estimates. The UK’s economic outlook may not be helpful, but the FTSE 100’s members get two-thirds of their earnings from overseas, and the pound is still well below where it was a decade ago, just before the referendum on whether to stay in the EU or not.

Any further doubts about the AI boom, with regard to how the substantial investments are to be funded and whether they will get an adequate return, could favour London, given its lack of exposure here.

Meanwhile, the UK’s exposure to oil producers and miners could help if the wars in Ukraine and the Middle East drag on, or sustained bouts of inflation persuade investors to diversify and add exposure to commodities, or “real assets”.

Often forgotten, the FTSE 100 – and wider UK stock market – is an absolute cash machine right now, and that helps to make a valuation case for exposure as part of a balanced portfolio.

Analysts expect the FTSE 100’s members to pay out £88.8bn in dividends in 2026, while planned share buybacks by the index’s members currently come to £45bn.

Add in around £10bn in dividends and £7.9bn from buybacks from other members of the FTSE All-Share and Aim All-Share indices, and the £70bn in live or completed takeover deals, and investors with exposure to UK equities are poised to pocket £217bn this year, if all goes to plan.

That figure equates to more than 7pc of London’s £3tn stock market capitalisation, which, as a total cash yield, looks more than respectable relative to the 2.6pc prevailing inflation rate, the 3.75pc Bank base rate and the 5.05pc benchmark 10-year gilt yield.

Style, not fashion

None of this offers any guarantees for the future, and dividend increases, buybacks and takeovers all tend to be pro-cyclical – there are more of them when things are going well, and far fewer of them when things start to go badly for whatever reason.

But the UK’s rise despite a torrent of negative commentary is an interesting example of how being a value-seeking contrarian can work, while the South Korean market’s recent travails flag the dangers of following the crowd at any price and jumping in with the momentum jockeys – even if that may have felt like good fun at the time.

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