Taylor Wimpey and Rio Tinto lead FTSE 100 closer to record high

The upturn in performance by UK equities continued today as the FTSE 100 index neared May’s record high and the mid-cap FTSE 250 stood at its best level since February 2022.

The latest rise of 1.2% for London’s top flight reflected the strength of recent corporate earnings and a boost for mining stocks on hopes of fresh stimulus for China’s economy.

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The possibility that the Federal Reserve will signal a September rate cut at the conclusion of today’s meeting also helped Wall Street markets improve after Tuesday’s tech sell-off.

Ahead of the US opening bell, the FTSE 100 index stood at 8,375 for a rise of about 8% so far this year. It had been as high as 8,399.88 earlier. The intraday all-time high is 8,474.

Source: TradingView. Past performance is not a guide to future performance.

The UK’s improved economic outlook and hopes that the Bank of England will cut interest rates, possibly as soon as tomorrow, have given mid-cap stocks a boost.

Strong performers in the past month have included the construction suppliers Travis Perkins (LSE:TPK) and Marshalls (LSE:MSLH) and the retailer WH Smith (LSE:SMWH). The FTSE 250 index is at 21,559, an improvement of more than 10% since the start of 2024.

Source: TradingView. Past performance is not a guide to future performance.

The wider FTSE 350 performance is another sign that the UK equity market is back in favour among international investors after a long period out of the limelight.

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UBS Global Wealth Management recently made the UK its preferred region and said it backed the FTSE 100 to reach 9,000 by the year end.

At a multiple of 11.2 times forward price-to-earnings, UBS notes the UK offers attractive value at a 12% discount to its average since 1987 of 12.8x.

Its support also reflects the likely start of a rate-cutting cycle, an improved economic outlook, a turn in UK profits and prospect of political stability relative to other regions.

Even though the FTSE 100 hit a record earlier this year, UBS said the UK underperformance over the past decade has been startling.

It noted last week that £100 invested in the FTSE 100 ten years ago would now be worth £177, taking into account both share price moves and dividends.

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This materially lags the EuroStoxx 50, Japan's TOPIX and the S&P 500 index, which would have seen that £100 grow to £228, £243 and £455 respectively.

Limited exposure to the technology sector has played a role in this underperformance, along with slow domestic economic growth, high interest rates and political instability.

Not only have UK profits lagged that of the eurozone, Japan, and the US, the UK is also the only one where valuations (price-to-earnings) have derated over the past 10 years.

The bank expects UK economic growth to accelerate to 1.5% next year, which in conjunction with a positive view on oil and industrial metals should support FTSE 100 earnings.

After an 11% fall in corporate profits last year, the bank anticipates 4% growth in 2024 and 7% growth in 2025.

A 4% dividend yield also boosts the appeal of the FTSE 100, fuelled by two of the sectors in today’s reporting spotlight.

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​​​​​Taylor Wimpey (LSE:TW.) trades with a forward dividend yield of 6%, underpinned by the housebuilder’s  policy to pay out 7.5% of net assets or at least £250 million annually throughout the cycle.

This led to an unchanged interim dividend of 4.8p a share, which is due to land in accounts in November. Underlying profits fell 21% to £187.7 million, offset by full-year guidance for completions at the upper end of the previous 9,500-10,000 range.

In line with policy, the 6.9% yielding Rio Tinto Registered Shares (LSE:RIO) declared a half-year dividend equivalent to 50% of earnings in today’s results. Underlying earnings of $5.8 billion (£4.5 billion) were 14% higher and led to an interim payout of $2.9 billion (£2.25 billion) or 177 US cents a share.

The award had been 376 US cents in August 2021, when Rio also included a special dividend of 185 US cents for a total distribution of $9.1 billion equivalent to a 75% payout ratio.

Rio Tinto shares rose 93.5p to 5029p but lagged the wider mining sector, while Taylor Wimpey lifted 2.2p to 160.75p.