FTSE 100 to reach record high, predicts Morningstar columnist

on May 5, 2014
Updated: Oct 21, 2019

You can’t please everybody but even the most begrudging economists have to admit that the first quarter growth figure was pretty good. The recovery remains on track. The more optimistic commentators were hoping that UK GDP would be up by 0.9% in the first three months of 2014.

Given the wet weather we had in that period, we should be more than satisfied that the actual figure was only a shade less at 0.8%. The actual estimate is even better than the 0.7% recorded for the final quarter of 2013 and, if this trend continues, we shall in 2014 enjoy our best year since the financial crisis broke.

The services sector, which accounts for about three quarters of the UK economy, grew 0.9% while manufacturing was the star with 1.3% growth. Construction, held back by the unfavourable weather, still managed 0.3%, so improvement came across the board. We can already start to hope that the second quarter will see further growth.

Construction is likely to rebound as projects that were held up get moving again. Manufacturing did particularly well in April, according to the reliable PMI index which showed a higher rate of growth than in March against expectations of a slight slowdown. Manufacturing is creating jobs, boosting productivity and paying higher wages.
It is significant that this is being achieved against a backdrop of a stronger pound. One reason for the improvement was lower input prices as imported raw materials and parts became correspondingly cheaper. A strong pound is good for the economy. Economic news from the US was less encouraging.

GDP there edged up just 0.1% in the three months to the end of March. Again weather was a key factor so we can hope for better in the second quarter. The Federal Reserve Bank clearly does not fear the worst, for it has again reduced the amount of money it is pumping into the economy by $10 billion a month.

Some time this year the US economy will be off this life support. The FTSE 100 index has edged higher and is challenging the 6,800 points level. It has done well since some pundits suggested that forecasters such as myself, who are confident that the index will set a new record some time this year, would have to revise their projections downwards. Not yet we won’t.

My Morningstar colleague Emma Wall has drawn my attention to the fact that of the £2.5 billion tucked into ISAs last year, a whopping £358 million piled in during the final five days of the financial year. I hope readers will ensure that they are not among the laggards this year. The sooner you start to invest, the sooner you start to earn dividends. Don’t let any idiot tell you to sell in May and go away. The odds are that shares will be higher by the end of summer.

**No Use Crying Over Spilt Oil**
Once again Shell has come out on top of BP (BP.). Despite seeing a 3% fall in profits in the first quarter, Shell (RDSB) saw its shares jump 112p to £25.43, thus resuming a long-term upward trend that was briefly interrupted by a profit warning in January. The profits fall was not as severe as analysts had feared and Shell is already claiming a return to more robust profits. Equally important is that Shell is not so heavily dependent on Russia as BP. As tit-for-tat sanctions bit ever harder, BP’s commitment to Russian oil giant Rosneft looks increasingly problematic. I remain committed to my holding in Shell and happy that I have stayed well clear of BP since the Gulf oil spill.
Source: Morningstar, Rodney Hobson