LONDON, April 23 (Reuters) – London’s FTSE-100
hit a record high on Tuesday, raising hopes that Britain’s stock
market might finally be shaking off years of underperformance as
investors look for bargains and UK growth picks up.

Months after rival indexes across the world started chalking
up records, Britain’s benchmark stock index touched a new peak
of 8,076.52, surpassing its previous high from February 2023.

The new peak brings this year’s gains for the FTSE 100 to 4%
– still behind the 6% rise in the pan-European STOXX 600
, as well as France’s CAC 40 and Germany’s DAX
, which are up 7.5% and 7.8% respectively.

The FTSE-100 has long underperformed – whether because of
the uncertainty surrounding Britain’s economy since its 2016
vote to leave the European Union or because of its perceived
shortcomings compared with rival indexes.

Heavily weighted towards basic resources stocks, the
FTSE-100 has not benefited from the AI-mania that has lifted
U.S. markets, nor from the surge in luxury stocks. Nor could it
tap in to the boom in anti-obesity drugs that has made Denmark’s
Novo Nordisk one of the world’s most valuable companies.

But some of these drivers for foreign markets have started
to wane, just as rising commodity prices, a weaker pound, a
pick-up in UK growth – and lowly valuations – are tempting some
investors back to London-listed equities.

“The UK has been cheap for a while, it’s cheap relative to
history, it’s cheap relative to global markets, particularly
cheap against the U.S.,” said David Cumming, head of UK Equities
at Newton Investment Management, who also said the FTSE-100’s
record high could mark a new dawn rather than a short-term blip.

“The catalyst would be the economic data in the UK is
getting better, we are returning to growth,” said Cumming.

The London market has a price/earnings ratio of less than
11, compared with 13 for the STOXX 600 and 20 for the S&P 500
, trading near its largest discount on record, based on
LSEG Datastream data.

The view of the UK stock market as undervalued has
contributed to a dip in new listings in London, and spurred a
political push to boost the market, including talk of getting
pension schemes to up their exposure to UK stocks and plans for
a new “UK ISA” tax-free savings product for retail investors.

MORE THAN JUST CHEAP

“The FTSE 100 has recently benefited from the broadening of
the rally out of Big Tech, pick-up in commodities and a more
diversified sector composition. A weaker pound has been an
additional tailwind,” said Barclays head of European equity
strategy Emmanuel Cau.

The pound is down around 2.2% against the dollar this year,
boosting some of the profits FTSE-100 companies make abroad.

Barclays estimates that about 75% of the revenues of
FTSE-100 companies are generated overseas.

Higher energy prices are adding to the positive mood for the
resources-heavy FTSE-100, with oil prices up 13% this year.

Meanwhile, traders are betting the Bank of England will cut
interest rates slightly more aggressively than the U.S. Federal
Reserve in 2024, with around 50 basis points of UK cuts priced
in for this year as of Tuesday, versus 40 in the U.S.

Lower interest rates tend to boost the appeal of higher
yielding assets, such as equities.

“We are also seeing signs of life in the UK economy, with a
recent pick-up in activity indicators like PMI, consumer
sentiment,” said Barclay’s Cau.

UK businesses recorded their fastest growth in activity in
nearly a year this month, suggesting a rebound from 2023’s
shallow recession is bigger than economists had been expecting.

Zooming in, top quality UK stocks are coming back into
focus, according to Kathleen Brooks, research director at XTB
who in a recent note pointed to engine maker Rolls-Royce’s
40% rise this year.

“Thus, while it has been easy to dismiss the FTSE 100 as
U.S. tech giants steal all of the glory, some UK companies have
made an astounding comeback,” Brooks said.

Other top performers include mining giant Glencore
which is up about 24% in the last two months alone, while banks
NatWest and Barclays are up 30% and 25% this
year, respectively.

A flurry of mergers and acquisitions is also lifting UK
equities, particularly among medium-sized companies.

On Monday, Hipgnosis Songs Fund shares soared as
much as 20% after Blackstone proposed to buy it, outbidding
Apollo-backed Concord.

Last week, U.S.-based International Paper agreed to
an all-share deal to buy UK-listed DS Smith for 5.8
billion pounds ($7.2 billion), edging out a bid by Mondi.

“There has been a pick-up in M&A in the UK … which
highlights the fact that valuations are quite low,” said
Newton’s Cumming.

(Editing by Amanda Cooper and Mark Potter)