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Yesterday (14 July), the FTSE 100 traded above 9,000 points. Despite some investor concerns about the health of the UK economy, I think there are several reasons why the main UK stock market can push higher in the coming months. In fact, I’m not ruling out a move to 10,000 points by the end of the year. Here’s why.
International exposure
I still feel that some people get confused by assigning too much importance on how the economy is performing when it comes to the FTSE 100. Most of the large-cap stocks within the index are international. They choose to be headquartered in the UK, or listed here. This doesn’t mean that the UK market is the largest for the company, or even that it generates any meaningful revenue on our shores.
Although I’m not particularly optimistic about the UK economy going forward, I remain upbeat globally. The US is performing very well, despite concerns about tariffs. China is showing signs of recovery. The European Central Bank committee is nearing completion of its interest rate cuts, as it believes inflation is now under control. This bodes well for international companies to grow their earnings this year. It should filter down to higher share prices, driving the index up.
On the other hand, a weakening UK economy should cause the British pound to depreciate. It could trade down to 1.20 against the US dollar, which would reflect an 11% fall. Given that most FTSE 100 companies are net exporters, this would provide a boost of a similar amount to their earnings when they are repatriated back to the UK. In theory, an 11% increase in the earnings for the index could push the price up. An 11% move would tally 10,000 points.
Valuation metrics
The current price-to-earnings (P/E) ratio for the FTSE 100 is 16.5. When I compare this to the S&P 500 at 29.9, it appears to be a bargain. If I assume the aggregate earnings per share for the FTSE 100 remains the same but the P/E ratio rises by 11% to 18.3, this would put the index at 10,000 points. Even at that level, it still would be valued lower than the US, so I don’t feel it’s an unrealistic expectation.
At a stock level, there are undervalued companies that could shine and act to help push the index higher. For example, Kingfisher (LSE:KGF) has experienced a modest 3% share price rally in the past year. Yet, with a price-to-earnings ratio of 13.55, it’s below the index average. The retailing, DIY, and home improvement stock is also a way off its 52-week highs. However, quarterly results from May showed strong UK and Ireland revenue growth of 6.1% compared to the same period last year.
I think the stock can climb over the coming year. Further interest rate cuts are expected to lead to higher demand for properties, driven by lower mortgage rates. By extension, this creates more demand for home improvement projects.
One risk is France, where stores have been underperforming. The business can’t just rely on the UK market to cover the shortfall going forward. Yet on balance, I think it’s a stock to consider as part of a broader move higher in the FTSE 100.
