FTSE 100 record highs: what does it mean for investors?

• FTSE 100 surges: the index is up over 8% in 2024, signalling a strong comeback 
• Aerospace & defence dominance: BAE Systems and Rolls-Royce lead gains, with BAE's market cap up by a quarter and Rolls-Royce rallying over 40% 
• Mining sector boom: Anglo American's 35% surge fuelled by M&A speculation, though concerns of London exodus loom 
• Financial stocks rebound: NatWest and Barclays recover from scandals, supported by brighter UK economic outlook and higher-for-longer interest rate expectations

After a period of underperformance for UK markets, the FTSE 100 could be back in vogue as it continues to scale fresh record highs. However, the index is not a barometer for strength of the UK economy, rather it is an outward-looking index comprising largely of multinational conglomerates.

So far this year, the FTSE 100 has gained more than 8%, more than double its return of 3.8% for the whole of last year. The aerospace and defence sector has been powering gains for the London-listed blue-chip index, with shares in Rolls-Royce Holdings (LSE:RR.) and BAE Systems (LSE:BA.) outperforming.

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BAE Systems’ market capitalisation has jumped by around a quarter since the start of 2024 and has rallied more than 40% over a one-year period, supported by geopolitical instability in the Middle East, as well as the war in Ukraine, that have both powered demand for defence spending. Just this morning the company said it is on track to meet its growth forecasts, partly thanks to the UK government’s commitment to increase defence spending over the course of this decade.

Engine maker Rolls-Royce has also been going from strength to strength as a stellar performer on the FTSE 100 ever since the appointment of Tufan Erginbilgic as CEO at the start of 2023 who has spearheaded a successful turnaround, helping the stock rally over 40% so far in 2024. 

The mining sector has been another winner within the large-cap UK market this year, fuelled by M&A speculation around Anglo American (LSE:AAL) that has contributed towards its 35% share price surge year-to-date. BHP Group Ltd (LSE:BHP) appears to be the main bidder, but Glencore (LSE:GLEN) is reportedly also has an eye on Anglo, which could prompt a bidding war and fuel further gains for the stock. Anglo’s copper assets are in high demand because of their importance in the green energy transition as well as the metal’s significance in the artificial intelligence (AI) revolution too. However, BHP’s approach sparks concerns that London would lose yet another important listed company, adding to the narrative that UK Plc is facing a mass exodus.

Financial stocks such as NatWest Group (LSE:NWG) and Barclays (LSE:BARC) have been outperformers too this year, helping spur gains for the FTSE 100. After a tough time last year for NatWest amid the Nigel Farage de-banking scandal, which led to the ousting of its CEO Dame Allison Rose, the stock has been regaining ground off the November lows. Its first-quarter earnings largely managed to beat expectations last month, further supporting the uptrend.

Shares in Barclays also had a rough ride last year, but the stock started reversing course late last year, aided by the brighter outlook for the UK economy this year as well as the higher-for-longer interest rate rhetoric.

WHAT DOES THIS MEAN FOR INVESTORS? 

While it has been tempting in recent years to stick only with the US market, given its outperformance, the FTSE 100’s impressive returns this year highlight the importance of sticking with a globally diversified portfolio and not shunning underperforming markets since dynamics can swiftly change. ‘Owning the market’ is a popular strategy whereby investors ensure their portfolio covers a broad spread across major markets to avoid missing out when markets play catch up.

There’s no denying that the UK economy is still grappling with issues from sluggish growth, above-target inflation, longstanding low investment, weak productivity, and struggling public finances. Nonetheless, optically, all-time highs for the FTSE 100 are extremely encouraging from a confidence perspective, and they may help change the narrative away from one focused on the exodus of big business from London’s public markets, towards one more focused on the opportunities within UK Plc for investors instead.

FTSE 100 TOP 10 PERFORMERS IN 2024, SO FAR

Source: interactive investor using SharePad. Data as at close of business 8 May 2024. Past performance is not a guide to future performance.