22 February 2023
The FTSE 100 has been flirting with an all-time high for some weeks before recently breaking through the 8000 barrier. In many ways, this reflects the challenges of wealth management, specifically asset management, with the UK apparently on the verge of recession and continued politicalunrest. So, why is the FTSE 100 at a record high?
Recently we have seen stronger-than-expected figures from the likes of Tesco, Sainsbury's and Marks & Spencer, which have set the tone in the short term. While many companies are still struggling, the depth of the expected recession is likely to be less than initially expected. Indeed, one economist recently suggested that the UK will escape recession, although likely only by the skin of its teeth.
It is also important to mention the energy and commodity sectors which have benefited from recent events. However, the impact of these sectors on the market is starting to diminish as we hopefully look to get back onto an even keel.
While food inflation is still at a 45-year high, the broader measure of inflation fell again in January, down to 10.1% from 10.5% in December. The Bank of England believes that inflation will be down to around 8% in July and fall further towards the end of the year. Even though this is a massive economic boost, we aren’t out of the woods concerning the energy crisis and the Ukraine/Russian conflict.
While interest rates increased again this month, up to 4%, they are expected to peak at around 4.5% if the Bank of England's forecast is correct. Some analysts believe the rate will peak at approximately 4.25% amid signs that the much-discussed recession may be less severe than first expected.
The increase in interest rates is prompting wealth managementcompanies to reassess their asset management profiles. While there is long-term potential for further growth, we are starting to see some reasonably solid high-yield stocks emerging. Indeed, some investors are looking towards savings accounts which are an integral part of any asset management strategy. Cash on hand for those unexpected opportunities!
Somewhat bizarrely, over the last 12 months, the weakness in sterling against the dollar and euro has increased sterling-translated profits from overseas. Wealth managementcompanies are well aware that circa 70% of revenues for FTSE 100 companies originate from overseas. So, when looking at asset management, wealth management companies need to look at markets and sectors and the impact of currency fluctuations.
If you look back over the last 12 months, you will see the likes of the Bank of England prepping the markets for a "deep recession". Initially, the recession was expected to last around two years, and then it was suddenly slashed to just over one year. There is now a growing belief that the UK could actually avoid a recession, albeit an outside chance. A technical recession consists of two economic quarters where there is negative growth. As growth in the final quarter of 2022 came in at 0%, technically, the UK is not in recession. This then prompts the question, should we take our lead from markets instead of economists?
If you listen to one economic adviser in isolation, whether this is the Bank of England or one of many independent bodies in the UK, you only have one opinion. The price of shares quoted on the UK stock market is a product of supply and demand based on prospects. So, if we have hundreds of individuals with their particular views on the economy, and in this instance, the chances of recession, they will place different pressures on share prices.
Ultimately, market movements will be dictated by the cumulative opinion of "experts" and investors. Is this why the FTSE 100 has performed better than many had expected over the last six months? Only six months ago, leading experts predicted a deep recession, but the market movement seemed to suggest otherwise.
While there is no doubt there are one-off factors affecting the value of the FTSE 100 index at this moment in time, the general concept of stock markets being an information exchange is fascinating. We know markets tend to look at least nine months in advance to value companies today. While some may be sceptical, we seem to have a case of the tail wagging the dog, with markets suggesting a lighter touch recession for some time while the Bank of England and other bodies appeared to be scaremongering.Back to News