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FTSE 100 on verge of full recovery from Covid crash
The FTSE 100 is a whisker away from finally clawing back all the lost territory caused by the global market crash in February 2020.
At the time of writing (16 Nov), the UK blue chip index traded at 7,343. It needs to rise by less than 1% to hit 7,403 which is where the FTSE stood on 21 February 2020 before global markets went into freefall.
It’s been a long time coming and breaking through the 7,403 level would be important from a psychological perspective. It would suggest that UK stocks have moved beyond the Covid recovery stage and that investors are now focused on the next stage of a company’s life.
It would also end the embarrassment over the UK stock market being stuck in the mud, given that it took less than four months for the Nasdaq index in the US to recover all its losses caused by the global market crash. It now trades 66% ahead thanks to tech stocks doing well.
The UK has lagged due to the type of companies you find in the FTSE 100. As a market cap-weighted index, the FTSE’s performance is heavily influenced by oil producers, banks and consumer goods companies which are among the biggest constituents.
Oil was in the doldrums until about a year ago, so Royal Dutch Shell (RDSB) dragged on the FTSE’s recovery for a while. Names like HSBC (HSBA) and Unilever (ULVR) haven’t performed that well since the market crash, and they’ve also held back the index.
Despite the overall UK index being a laggard versus other geographic territories such as Japan’s Nikkei (+27% since the 2020 global market crash) and Germany’s Dax (+19% over the same period), the FTSE 100 has still had some big success stories.
Since that big market downturn as the pandemic first unfolded, shares in Royal Mail (RMG) have increased by 150% in price, driven by the e-commerce demand surge. Ashtead (AHT) is up 135% thanks to a rebound in US construction activity and it being a likely beneficiary of Joe Biden’s $1 trillion infrastructure plan.
It would be great to see the FTSE move above 7,142 but there is a big headwind to consider. The Bank of England is expected to raise interest rates in the UK soon and that will theoretically be positive for sterling, which in turn is bad for the FTSE given around 70% of the earnings generated by its constituents are denominated in foreign currencies.
Investing in the UK market can be frustrating at the best of times and this is a reminder to diversify your portfolio geographically rather than just sticking with the UK because of home bias.