FTSE100 record high – Why investors are returning to the UK
Garry White, chief investment commentator at Charles Stanley
In the last two months, investors have started buying UK shares again after years of net selling. UK equity funds ended a 41-month streak of outflows in November as investors eventually reversed the flow of money back onto UK equities. This is a result of a combination of factors.
In the lead-up to chancellor Rachel Reeves’ first budget at the end of October, UK equity fund withdrawals reached their highest level on record. It is not strictly true to say the market liked or was reassured by the chancellor’s proclamations – a wobble in the bond markets proved this was not the case. However, it seems that the perception of international investors towards UK equities has evolved in recent months. There’s more predictability, especially when compared with the political situation in the US.
The election of Donald Trump has certainly helped. Worries about the potential inflationary nature of policies such as tariffs have seen a strengthening of the dollar as expectations of US interest-rate cuts have been pushed further out. Many companies in the FTSE 100 are substantial dollar earners, in the oil and mining sectors as well as pharmaceuticals. This currency effect is positive for earnings and the dividends that the businesses pay out when changed into sterling.
There has also been the return of ‘animal spirits’ as merger and acquisition activity has picked up. Aviva agreed to buy Direct Line. There was also speculation of a Rio Tinto/Glencore merger to help valuations in the mining sector, to name but a few.
With US valuations stretched and concerns over the outlook for artificial-intelligence-related growth stocks after the DeepSeek announcement combined with the uncertainty of a Trump presidency, it is easy to see why international investors are looking at the cheaper valuations available in London as part of the answer to US uncertainty.