FTSE 100: Record close in sight

With the FTSE 100 breaking past the 8,000 level – and at 8,039 points at the time of writing – the blue-chip index is honing-in on a record high if it can hang on to those gains by the end of the day on Friday.

Some positive headlines for the UK equity market will certainly be welcome news given it has been somewhat unloved in recent times and endured a raft of negative stories about investor outflows and companies switching their listings overseas.

Friday’s confirmation that UK GDP expanded by 0.1% in February, following on from growth of 0.3% in January, will be seen by many as the key reason for the latest market moves as the data signals that the technical recession that the UK entered at the end of last year is almost certainly over. A good day for shares in housebuilders Taylor Wimpey and Persimmon reflects improving optimism about the domestic economy.

However, other factors driving the FTSE 100 bounce are perhaps less cheery in nature. Heightened tensions in the Middle East with the risk of a regional war between Iran and Israel breaking out imminently, have propelled both oil and precious metal prices higher. Among the best performers in the FTSE 100 today are mining and energy stocks.

As of midday [Friday], Fresnillo – the world’s second largest gold miner and largest silver producer – was the best performing FTSE 100 constituent – rising c5%, followed by major copper producer Antofagasta and Anglo American, the world’s largest platinum producer. Energy is a major sector on the UK market, representing 12.8% of the FTSE 100, and both BP and Shell are on the rise against a backdrop of Brent Crude oil prices exceeding $90 a barrel.

Although the UK’s blue-chip index is near a record high in point terms, this is certainly not an indication that UK-listed shares are now expensive. Far from it.

A better measure is where shares prices are in relation to expected earnings and in this respect the market is cheap both compared to global equities – with UK shares trading at a price/earnings ratio around 37% lower than global equities – and their long-term median valuations.

At such giveaway valuations, expect to see continued bids for UK-listed companies by overseas buyers – the number of takeovers of UK public companies reached the highest level in a decade last year – but cheap valuations are also spurring many companies to launch share buybacks, which should boost shareholder returns.

There are plenty of opportunities in UK equities at the currently and for bargain hunters one way to benefit from this is by investing in UK equity focused investment trusts whose shares are trading at discounts to the value of the underlying portfolios they own.

Strong trusts to consider include Fidelity Special Values plc (-9.3% discount), Mercantile Investment Trust (-12.6% discount), Murray Income Trust (-11.5% discount), Temple Bar Investment Trust (-9.9%) and Henderson Smaller Companies (-15% discount).