Stocks
Prospect of tightening fails to put off FTSE
(FT) - So much for the idea that the start of fiscal and monetary tightening would trigger a stock market correction. Since equity markets wobbled a month ago as China moved to rein in lending and the Bank of England put quantitative easing on hold they have been headed in just one direction – higher.
On Friday, the FTSE 100 closed at its highest level in 18 months and the index is now in positive territory for the year. So, why aren’t equity markets worried about the withdrawal of massive economic stimulus, or for that matter the sovereign debt crisis in the European periphery? And can equities make progress?
For the London market, at least, there are grounds for being positive. One reason is the weakness of the pound. The FTSE 100 is home to many big dollar earners, which benefit when overseas earnings are converted into sterling. Indeed, this translational effect is already being seen in the current reporting season. For example, Pearson, the owner of the Financial Times, this week reported a 17 per cent increase in annual revenues. Adjusted to take account of currency fluctuations, sales were actually up 4 per cent. The international make-up of the London market – over 75 per cent of earnings come from outside the UK from industries such as mining, oil and pharmaceuticals – has other benefits. This is especially the case at the moment as investors are looking for exposure to emerging markets where there are fewer doubts about the sustainability of the economic recovery. Many investors are also keen to avoid too much exposure to developed markets, where governments are attempting to tackle the large fiscal deficits run up during the financial crisis.
As such, it is hardly surprising they are looking to increase their exposure to international businesses such as Rio Tinto, BHP Billiton, Vodafone and GlaxoSmithKline. It is also unsurprising that the FTSE 100 – which is long global GDP and short UK GDP – is benefiting as a result. Citigroup strategist Jonathan Stubbs says this is the right way to be positioned given the current economic backdrop and explains why large “mega-cap” stocks outperformed large and mid-cap stocks in February.
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