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The Accumulator: FTSE's record run isn't all it seems

The Accumulator: FTSE's record run isn't all it seems

by Daniel Grote Jan 13, 2017 at 12:59

The FTSE 100's remarkable run continued this week, with the index making a daily habit of breaking records, despite US president-elect Donald Trump's best efforts to scupper the stock market bullishness sparked by his election victory.

The UK blue-chip index yesterday notched up its 13th consecutive daily rise, including 11 at all-time highs, smashing previous records, as the stock market optimism that sparked last month's 'Santa rally' carried over into the New Year. All the signs meanwhile point to the index notching up another milestone today.

While the FTSE 100 has led the way in record breaking, it isn't the only index breaking new ground. In the US, the Dow Jones and the S&P 500 both set all-time highs last Friday.

But our exclusive Accumulator data table shows the headlines don't tell the whole story. Despite its record-breaking streak, the FTSE 100 is only up 1.3% over the week to yesterday, trailing other developed markets. While the index's momentum has been impressive, it's not quite in tearaway bull market territory.

Then there is the pound's role in the FTSE 100's run. With members of the index deriving around three-quarters of their earnings from overseas, a fall in the pound tends to spell good news. And 2017 has so far obliged, with sterling earlier this week threatening to revisit 31-year lows against the dollar on fears of a 'hard ' Brexit.

The pound's weak start to the year, down 3.4% against the yen, 2.1% versus the euro and 1.1% compared to the dollar, has also helped to boost UK investors' holdings on overseas markets.

So while the week has brought further gains from Europe and Japan, domestic investors in those markets have actually lost money, while the US stock market has largely traded sideways.

Mixed markets

All of which highlights a more mixed global market than the headline figures might suggest. For all the bullishness that has taken hold, this week actually saw the 'Trump effect' begin to wane.

Beyond the broad rally in developed markets following his election as US president, Trump's victory has helped to accelerate a rotation towards 'cyclical' stocks more sensitive to economic growth and away from more predictable 'defensive' companies and bonds over the last two months.

This has largely been founded on the belief that Trump's tax-cutting, heavy-spending agenda could lead to an upsurge in US economic growth.

That would spell good news for the cyclical stocks dependent on that growth, like miners and car markers, but the likely inflation and higher interest rates that could result would hurt the income attractions of defensive stocks and make their high levels of borrowing more expensive, while eating into the value of bonds' coupons.

Emerging markets, too, have suffered from Trump's victory, dragged down by the prospect of a more protectionist US with which it may be able to do less business, and a dollar that has rallied on the prospect of higher US inflation and interest rates, making their US dollar debts more burdensome.

But this week they have been the strongest stock market performers, with the MSCI Emerging Markets index up 3.4% over the week and a particularly strong showing from Brazil, 5.5% higher.

In Europe, bonds have outperformed shares, US treasuries are level-pegging with the S&P 500, and the dollar, although rising against the Brexit-battered pound, has been weak against other global currencies like the yen and euro.

Trump disappoints

If the 'Trump effect' really has begun to wane, the culprit looks likely to be the man himself. This week he gave his first press conference in six months, with his most eye-catching impact on markets the sell-off in pharmaceutical companies sparked by his claim they were 'getting away with murder' by charging too much.

But there may be more long-term significance for markets in what he didn't say. Investors buoyed by Trump's campaign promises of more spending and lower taxes didn't find much to underpin those hopes this week.

'There was nothing on taxation or fiscal stimulus, but there was a pointed reference to trade and offshoring,' said Ed Smith, asset allocation strategist at investment group Rathbones. 'Are developed market equity investors right to be so bullish on fiscal stimulus from day one and so sanguine about the threat of a trade war?'

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