FTSE 100 Seen Hitting Fresh Peak in 2017 as Hedging Costs Slide

  • Strategists expect the British index will climb to 7,350
  • FTSE 100 trades at lowest since July 2015 to Euro Stoxx 50

The share price of the FTSE 100 index is displayed on an illuminated rotating cube in the atrium of the London Stock Exchange.

Photographer: Luke MacGregor/Bloomberg

The FTSE 100 Index rally that’s made the U.K.’s stock market one of this year’s biggest gainers in the developed world has more to go, whatever the Bank of England says on Thursday.

That’s the view that investors and strategists are taking. Options traders have pushed the cost of hedging against declines in the British index to the lowest level since August, while forecasters see the gauge climbing 5.5 percent to a record through the end of 2017. The FTSE 100 is heading for its first annual gain since 2013, thanks to a slump in the pound and recovery in commodity prices.

“The FTSE 100 is likely to re-test record highs above 7,100, especially if the steep drop in the pound in 2016 leads to an M&A binge for U.K.-based companies in the coming months,” said Kathleen Brooks, research director at brokerage firm City Index in London.

  • The last time the cost of hedging was this low, the FTSE 100 climbed as much as 2.7 percent in less than two months through an all-time high of 7,129.83 in intraday trading in October. The relationship between bearish and bullish options known as skew is 43 percent below the one-year average.
  • Strategists see the index rising to 7,350 by the end of 2017, according to the mean of six estimates compiled by Bloomberg.
  • Investors poured more than $200 million in the biggest exchange-traded fund tracking U.K. shares in December, heading for the biggest monthly inflows in more than a year.
  • With economic data holding steady, analysts see the Bank of England keeping its policy unchanged on Thursday. Almost two-thirds of those surveyed forecast that the next time the central bank acts will be to raise its benchmark rate from a record low as inflation picks up.

Another metric flashing buy is valuation: members of the FTSE 100 trade at about 14.5 times estimated earnings, the lowest since July 2015 relative to those on the Euro Stoxx 50 Index. Analysts expect profit at companies in the British gauge will jump 24 percent next year, compared with a 4.9 percent gain for firms in the European measure.

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