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Sell in May and go away. That was sage advice in 2018. It has taken five years for the FTSE 100 index to approach the record it hit back then. A strong recent run of outperformance is interwoven with the biggest interest rate rises in a generation. The outlook for the cost of money will help determine whether further highs occur soon.

Pundits who wrongly conflate the City benchmark with UK plc will struggle to believe the former can be doing so well. Britain is beset by high inflation and public sector pay strikes. The current government lacks scope for radical action after its shortlived predecessor shook investor confidence with ill-judged spending plans.

The UK benchmark share index could soon hit a record high after a strong performance over the past year. High weightings of energy, materials and financial businesses, given their strong earnings, boosted the FTSE 100. In place since the Brexit vote, a steep valuation discount persists.

The reality is that the FTSE 100 is a legacy of times when the UK looked out rather than in, via the British empire, the postwar Pax Americana and finally the EU.

This means three-quarters of FTSE 100 revenues originate from overseas. For example, AstraZeneca, the UK’s largest pharma group, made less than a tenth of its revenues in the UK in 2021. The strength of the dollar against sterling is one reason for the market’s outperformance. FTSE 100 earnings rose by a third overall last year.

Other macro factors have helped. Soaring prices for energy and metals benefited almost a quarter of the index’s capitalisation. Glencore mines coal and oil majors Shell and BP pump oil. Higher interest rates have meanwhile boosted near-one fifth of the index that are financial businesses.

Inflation is expected to cool and rate rises to slow. Energy prices have already moderated. A global downturn would be bad for miners. That would also flatten the trajectory of rates. FTSE earnings are at higher risk of downgrades, than, say, US rate-deflated US tech stocks

The consequence would be a widening of a UK Brexit discount. This has narrowed to 15 per cent on a forward earnings basis to Europe.

What UK investors would salvage is the knowledge that the FTSE 100 can be usefully defensive. The UK’s main index has decorrelated from US and Asian benchmarks, even as the UK has disconnected from the EU.

The Lex team is interested in hearing more from readers. Please tell us what you think of the FTSE 100 in the comments section below.

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