The FTSE 100 has the “space to kick on” despite its record-breaking run over the past few weeks, according to a leading analyst.
The blue-chip index has gained 8.9 per cent so far this year and has set 12 all-time highs in May, a record since the FTSE’s creation in 1984.
The FTSE 100’s recent rally has been fuelled by an improving economic backdrop for the UK, with the economy growing at its fastest pace in two years in the first quarter.
Simon French, head of research at brokerage Panmure Gordon, also pointed out the rally has been backed up by hopes that a “cornerstone buyer” will return to the market after “years of sustained institutional outflows”.
And yet the discount gap on UK equities to comparable markets has only narrowed slightly, from 19 per cent in the final quarter of last year to 17 per cent at the moment.
“UK valuations remain deeply subdued compared to their historic norms on both a relative and absolute basis,” French said.
“There is still plenty to go for, particularly further down the market capitalisation spectrum,” he added.
He argued that the main driver of improving valuations in the months to come would be changes to the flow environment. Through government and regulatory initiatives, such as the British ISA and the Mansion House compact, domestic investors are slowly moving back into the domestic market.
The British ISA will allow investors to put an extra £5,000 into UK equities tax-free on top of the existing £20,000 ISA limit.
The Mansion House Compact meanwhile requires signatory pension money managers to invest at least five per cent of their managed assets in growth companies.
“We sense that the British ISA and pension fund asset disclosure policy initiatives are beginning to generate interest amongst both institutional and retail investors as the UK equity market seeks to reinstate a cornerstone buyer,” he said.
“There have been false dawns before,” French said. However, he stressed that the “opportunity is real, broad-based across all sectors…The opportunity for investors continues to hide in plain sight”.