The FTSE 100 closed at a record high yesterday (October 12), following a fall in the value of the pound due to Brexit talks reaching a deadlock.
The index of the UK’s 100 largest public companies closed at 7556.24.
The rally was largely driven by increased uncertainty around the UK’s departure from the European Union. After both sides of the table in the Brexit negotiations admitted that talks had reached a deadlock, the value of the pound fell against the dollar by 0.4 per cent, reaching $1.3171.
At one point during trading, sterling also reached a four-week low against the euro, dipping to €1.109, before making a pre-close recovery.
This resulted in a rally for the FTSE 100, due to the boost a decline in the pound brings for companies that earn revenues in foreign markets.
FTSE 100 companies are heavily exposed to foreign markets, particularly European and emerging market economies. In total, around three quarters of FTSE 100 income is generated abroad.
Some of the index’s biggest risers yesterday, for instance, were companies heavily dependent on overseas markets for earnings, such as a Burberry (up 2.7 per cent) and Unilever (up 2.1 per cent).
This decline in the value for the pound is good news for such firms, inflating the profits and dividends as earnings are converted into a weakened pound.
As we reported back in September, the weak pound since the Brexit vote means that UK investors can expect a dividend windfall from many FTSE 100 listed companies totalling £8.2 billion.
The rise in the FTSE 100, however, is not a reflection of increased confidence in the UK economy. As Jason Hollands, managing director of Tilney Bestinvest, told Money Observer earlier this year, ‘relationship between domestic UK growth and the UK stock market is extremely tenuous.’ Instead he adds: ‘The UK market is highly international in nature, with the FTSE 100 in aggregate having more revenue exposure to both emerging market regions and continental Europe than it does to the UK.’
Also driving the surge in the FTSE 100 was energy companies, following news that the government’s planned energy price cap won’t be imposed until 2019. Centrica, which owns British Gas, saw its price rise by 1.9 per cent, while SSE rose by 2.5 per cent.
In early trading this morning (October 13) the FTSE 100 was largely trading flat, posting a small loss of 0.18 per cent to trade just shy of 7,500 at the time of writing (11.15).
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