Britain’s blue-chip index has hit a series of new record highs in the past few months, gaining 17% since the Brexit referendum. But this could be as good as it gets for a while. One reason to think so is the dwindling boost from sterling. For much of the past year, a weak pound has been good news for blue-chip equities, as many of them are large multinationals whose foreign earnings are boosted by a fall in sterling, says Richard Barley in The Wall Street Journal. Only 26% of FTSE 100 sales are made in the UK.
Now, however, the pound has stabilised, and even risen slightly, so a significant boost from this quarter looks unlikely. Indeed, the last meeting of the Monetary Policy Committee showed that three members now want to raise interest rates. The prospect of higher rates implies a greater return on UK assets, bolstering demand for sterling.
The resilience of the economy has also helped foster a positive view of British stocks in general, but while the economy should stay solid, there is less scope for significant upward revisions to growth now, says Capital Economics. The prospect of higher rates is also a headwind for stocks. Valuations don’t look especially cheap and the global backdrop “looks set to become less supportive”.
Wall Street, which sets the tone for world markets, is very expensive and corporate profit margins will be “squeezed” by the tight labour market. Still, while stocks may not rise much further from here, they are unlikely to slump either. British equities “offer the richest dividend yields among developed countries”, as Bloomberg’s Blaise Robinson points out. That makes them “very attractive” to global yield-hunters.