FTSE 100 surges 4% so far this year despite looming recession

The FTSE 100 has started 2023 strong after hitting new highs this week, despite predictions that the UK is the only major economy heading for recession this year.

Although London’s top index has cooled from the all-time high of 7911.15 reached in yesterday’s session, it has continued to climb 4 percent since the start of the year.

It was the second time the Footsie closed at a record high this year, after hitting even higher peaks in intraday trading.

Today the index has pulled back slightly, falling 0.6 percent to 7,863.58 at the close, but analysts are forecasting more gains for the UK blue chip index, with some saying it could hit the 8,000 mark next week .

This despite the gloomy outlook for the British economy, which narrowly avoided a recession at the end of last year.

Official figures today show that gross domestic product (GDP) remained flat in the last quarter of 2022, avoiding two consecutive quarters of contraction or a technical recession, after the economy contracted by 0.2 percent in the third quarter .

A stronger performance in the early part of the period was offset by a 0.5 percent decline in December, with strikes and snow causing chaos, the Office for National Statistics said.

But GDP remains below pre-Covid levels, and the Bank of England has forecast the economy to contract every quarter of this year.

Growth prospects for 2023 are constrained by pressures on households and businesses from high inflation, rising interest rates and ongoing global uncertainty.

Nevertheless, the FTSE 100 is expected to continue to make gains.

The index, with its array of multinationals, which are often dollar earners, is unlikely to keep up with the UK economy.

Isabel Albarran, investment officer at Close Brothers Asset Management, says: ‘Fortunately for investors, it is not necessary for the UK economy to do well for the UK stock market to perform well, and in fact it is often the opposite.

“A weak pound is good for UK companies with large international footprints, and the FTSE 100 has hit record highs.”

The pound is down more than 10 percent against the dollar, trading slightly lower today at $1.21, accounting for the large number of FTSE 100 companies reporting in US dollars.

The Footsie has also benefited from an increase in commodity prices, which has supported the many commodity companies in the index, while the low price-to-book valuations of some stocks have made them more attractive to investors.

Markets.com analyst Neil Wilson says: “There are many reasons why the FTSE 100 is doing well: undervalued companies that have been relatively cheap relative to global equities, old stalwarts in the economy that have outperformed in recessions and periods of inflation; by which we mean a heavy weighting towards energy, raw materials and finance; and some good defensive positions in consumer staples and health care.”

Looking at the broader picture, China’s reopening and lifting of Covid restrictions has also boosted global markets as it could boost growth, along with hopes that domestic and US interest rate hikes would soon come to an end after a fall in inflation.

US indices have also been climbing since the start of the year, with the S&P 500 up nearly 7 percent, while in Europe, the German DAX is up nearly 9 percent.

Stocks that have driven the FTSE 100’s rally so far are more “domestically oriented,” according to Wilson.

J.D. Sports stocks, which took a hit in 2022, are up some 36 percent since the start of the year.

British Airways owner IAG has also rebounded strongly, with stocks up about a quarter so far this year.

Homebuilders, who were also among the losers last year for fear of a slowdown in the real estate market, have started 2023 well.

persimmon And Taylor Wimpy shares are both up about 16 percent, while Barratt Developments Shares are up by 13 percent and real estate website Rightmove by 11 percent.

Barratt, the UK’s largest homebuilder, said this week the housing market was showing early signs of recovery after a sharp slowdown following the turmoil caused by Liz Truss and Kwasi Kwarteng’s disastrous mini-Budget last September.

The FTSE 100 firm last month welcomed a ‘significant’ rise in reservations, the number of people applying for new homes.

Meanwhile, consumer-focused companies like Sainsbury’s and Kingfisher are both up 14 percent.

The gains so far this year add to a good 2022 for the Footsie, as it rose nearly 1 percent, defying the broader market slump.