Victoria Scholar discusses rise in interest rates
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The benchmark FTSE 100 index of top British companies beat almost every other stock market in the world last year, and is still roaring away in 2023.
While riskier stock markets like the New York’s Nasdaq index of technology stocks fell by a third last year, the FTSE 100 actually climbed as investors sought a safer home for their money.
London’s index contains a host of rock solid blue-chip companies, including oil giants BP and Shell, big banks Barclays and Lloyds, and mining companies like Rio Tinto, all of which have been in demand lately.
The index has rallied by more than 1,000 points since October, a rise of 18 percent, adding more than £300billion to share values.
Victoria Scholar, head of investment at fund platform Interactive Investor, said: “Despite last year’s equity market volatility and a slowing global economy, the FTSE 100 is defying the doom and gloom.”
Millions of Britons will be celebrating news that it hit a record high of 7,906.58 on Friday, the highest since May 2018.
Ordinary savers who invest directly in FTSE 100 stocks or hold them in a pension or stocks and shares Isa fund, see their capital grow when the index rises.
They also benefit from the regular dividends that companies listed on the index pay shareholders as a reward for holding their stock.
FTSE 100 companies pay some of the most generous dividends in the world, with an expected income yield of 4.5 percent this year.
That beats the return on every savings account right now, with any share price growth on top.
While investing in stocks and shares is riskier than depositing money into a cash savings account, history shows that over the longer run the rewards are much greater.
And despite its recent success, investment experts reckon FTSE 100 large-cap equities are still “a bargain on our own doorstep”.
Jason Hollands, managing director of online investment platform Bestinvest, said this is quite a moment as UK equities fly to fresh highs. “The FTSE 100 was the best-performing major equity index globally in 2022 and still looks well placed for the year ahead.”
He added: “The latest spike has been fuelled by optimism that an end to rate hikes is in sight amid signs that inflation has peaked.”
Many people will be confused to see the FTSE 100 on a high at such a difficult time for the UK, but Hollands says this is a highly international market. “Companies listed on the index collectively generate nearly 79 percent of their revenues outside of the UK.”
It is also famed as a defensive sector, as it contains energy companies like BP and Shell, healthcare firms like AstraZeneca and Glaxo, companies selling consumer staples such as Unilever, and cigarette makers including British American Tobacco.
Demand for their products typically holds up in a recession.
The FTSE 100 has minimal exposure to technology, which was seen as its Achilles’ heel until recently, Hollands said. “That is now working in its favour as tech giants like Amazon, Netflix, Meta Platforms (formerly Facebook) and Tesla all crashed last year.”
Hollands said some may fear UK shares are now too expensive but banking profits today could prove a mistake. “UK larger-company shares are still attractively valued, a bargain on our own doorstep. Valuations are a third cheaper than the rest of the world.”
That 4.5 percent dividend yield looks attractive as rates on cash deposits appear to have peaked in recent weeks, while 10-year UK government bonds, known as gilts, yield just 3.05 percent, Hollands added.
“This whopping yield premium strengthens the case for investing in UK large-cap stocks.”
He said that one of the simplest ways to get exposure is via a low-cost index tracking fund such as the iShares Core FTSE 100 UCITS ETF, which has an annual charge of just 0.07 percent.
While shares are one of the best performing investments of all over the longer run, the short term can be volatile. Neither share price growth nor dividends are guaranteed.
Pension and Isa investors should only put money in the stock market for a minimum period of five years, and ideally much longer.
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