Russ Mould, investment director at AJ Bell, explains:
“Assisted by sterling’s slide against the euro and dollar, and to some degree higher commodity prices, the UK’s premier index is seeing three encouraging trends, which help to explain why it is proving so resilient in the face of ongoing doubts over what Brexit will ultimately mean.
“First, earnings estimates are creeping higher for 2017, a trend which has not been evident for the past two years. The chart below shows how aggregate consensus analysts’ forecasts for the FTSE 100 members have changed on a quarterly basis since the end of 2014:
Source: Analysts consensus estimates, Digital Look, Thomson Reuters Datastream
“Second, after a run of downgrades, analysts are nudging up dividend forecasts, to the extent that total FTSE 100 distributions are forecast to rise by 8% this year and 5% next, to £72.8 billion and £76.6 billion respectively (excluding special dividends).
Source: Analysts consensus estimates, Digital Look, Thomson Reuters Datastream
“Finally, at current levels (around the 6,800 mark) the FTSE 100 offers a yield of 3.8% for 2016 and 4.0% for 2017. Both figures look attractive relative to cash but doubts continue to linger over just how safe the underlying dividend payments are. At least the increase in profits forecasts is boosting earnings cover estimates for the FTSE 100, even if the 2017 bottom-up forecast of 1.66 times is less than the ideal threshold of 2.00 times.
Source: Analysts consensus estimates, Digital Look, Thomson Reuters Datastream
“Ultimately it is a welcome change to see estimates rising rather than falling and it will be interesting to see if this momentum can be maintained.
“The Bank of England seems unwilling to rock the boat with interest rate rises but the actual implementation of Brexit remains an unknown and relying on currency weakness alone is unlikely to work forever.
“Investors and companies are waiting to see what Brexit means when Article 50 is finally invoked, but the cagey interim period looks to be bringing an unexpected bonus to the UK’s headline stock market index.”