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By: Simon Danaher

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February 25th, 2015

Why has the FTSE 100 hit a record high and what does it mean?

Financial Education

Explaining some of the key drivers behind yesterday's record stock market gains

The UK’s blue-chip index, the FTSE 100, closed at an all-time record high yesterday, finishing the day at 6,949.63, surpassing the previous record of 6,930.2 which was set at the height of the Dotcom boom on 30 December 1999.

Why has this happened?

As with all stock market movements, especially those which are significant, it is a combination of factors which will have driven the FTSE 100 to this level.

Why has the FTSE 100 hit a record high and what does it mean?

Yesterday, it is likely that positive news within the eurozone was supportive. Specifically, the approval by eurozone finance ministers of Greece’s reform proposals will have helped to buoy investors, with the threat of a so-called Grexit (Greece’s exit from the European Union) diminished. The approval means Greece now has a four-month extension of its bailout.

In fact, the monetary policy being applied in Greece is simply an extreme version of the quantitative easing (QE) programmes we have seen in an unprecedented number of countries since the global financial crisis of 2008. Put simply, these QE programmes mean governments are buying their own and corporate debt in order to pump money into the financial system.

There are other factors too of course which are helping to drive the FTSE to record highs.

Low oil prices, resulting in lower prices at the petrol pumps, have given an unexpected boost to growth in the UK this year, as the spending power of consumers has been significantly increased. This increased spending power has a knock-on impact on sales, particularly in consumer related sectors (think food and clothing) which of course supports the growth of the overall stock markets.      

This boost has caused many bodies to revise their growth forecasts for the UK economy – the CBI (the Confederation of British Industry) for example, increased its forecast for 2015 from 2.5% to 2.7% just last week.

What does this mean as an investor?

One market indicator not as widely reported as the headline figure is what is known as the price to earnings, or P/E, ratio. Without worrying too much about what this means (it’s perhaps too technical for this blog) it has only risen to about half the level it did ahead of the Dotcom bubble burst in 2000. This would indicate there is in fact potentially still some value left in the FTSE 100.

According to AES International’s head of investment services David Norton, UK equity managers will see this as an opportunity to consolidate gains.

"It's vital to use any chance for market gains this year, so we expect our managers to explore any further opportunity,” said Norton “With fears surrounding the upcoming UK election in May it provides an opportunity to consolidate UK equity gains and look to buy on dips in the coming months." 

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About Simon Danaher

Simon Danaher previously worked for AES International, in marketing and communications.