A less supportive global backdrop will contribute to the stagnation of the FTSE 100 for the rest of the year, according to a report from Capital Economics, which details why they believe the index won’t break 7,500 by the end of 2017.
This comes as the third part of a series, which hones in on the four reasons why the firm believes the UK blue-chip index will flatline.
Andrew Wishart, assistant economist, said: “The global backdrop looks set to become less supportive. We expect that the S&P 500 will do little more than tread water this year and next as margins are squeezed due to the effects of the very tight US labour market.
“To the extent that global stock markets move together, that would weigh on the FTSE 100.”
Performance of indices in 2017
Source: FE Analytics
Phil Harris (pictured), who co-runs the EdenTree UK Equity Growth fund, argued that there is still some potential upside to be felt in the US despite its labour market seeming tight at a headline level. 
“Obviously inflation has ticked up at the moment and most of that is clearly the devaluation effect feeding through. But, underlying inflation at this stage of the economic cycle - considering how tight labour markets are - has been surprisingly low,” he said. “There has been surprisingly little wage inflation if you think about it both here and in the US.
“You could probably say the US labour market is a little tighter than ours. In the US, although the headline looks quite tight, the participation rate – the number of people that participate in the labour market – is actually quite low still.
“So, there is still quite a lot of upside potentially if more people are sucked back into the labour market to take up extra jobs. That’s why the Fed is raising rates.”
The manager pointed out that unemployment rates in the US are at historic lows, which is at odds with the fact there has been no significant wage inflation.
“This tends to show that the cycle is aging and that central banks need to put rates up,” Harris explained. “There are very limited signs of this in the UK too, given what’s happened – you would expect people to be going out and demanding much higher wages given where unemployment is but that hasn’t happened.
“So far, wage pressure has been relatively limited which is clearly supportive for corporations. But, if that does change, it would clearly be unsupportive for valuations.”
Alan Custis, head of UK equities at Lazard Asset Management, said the S&P 500 index’s recent performance has been predominantly driven by high growth ‘FANG’ stocks (Facebook, Amazon, Netflix and Google) which the UK market has no equivalents to.
“We clearly don’t have those big tech-related names, we don’t have the Amazons, the Facebooks, the Googles and the like. We therefore wouldn’t be exposed to a correction of those types of names,” he reasoned.
“Having said that, the oil companies are now on a relative low to the market average and are certainly back at levels where the oil price was $28 per barrel at the beginning of last year.
“I think the UK market, which we know in dollar terms has been a poor performer, could potentially catch up if leadership in the market were to change for whatever reason this year. If, for example, we became more comfortable that the oil price wasn’t going back to $30 per barrel - which is what a significant chunk of the market is clearly now anticipating.”
Performance of index over 5yrs
Source: FE Analytics
As such, Custis said the FTSE 100 is likely to be more insulated from a potential stagnation of the S&P 500 than some investors believe. That said, he pointed out that it would depend on the cause of the correction in the US.
“From what we’re seeing at the moment from our standpoint, we remain pretty positive on the US economy,” the manager continued. “The Lazard team is still constructive and is still seeing significant value opportunities in the cyclicals in the US.
“I wouldn’t say we’re completely relaxed with it, but the market is taking on board the Federal Reserve tightening and acting in a fairly mature and grown-up way.”
However, Aviva’s Trevor Green agreed with Capital Economics that the global backdrop for the FTSE 100 looks set to become less supportive.
“What I watch closely is the US yield curve, which historically has been a good guide to the health of the US economy,” he explained. “After huge initial optimism post Trump’s election win, the yield curve has been flattening which means that US Treasuries are signalling slowing growth ahead.
“So while equity markets remain positive, we have a contrarian view on the bond market and this is less supportive for the FTSE 100 index going forwards.”
Richard Penny, who runs the L&G UK Special Situations Trust, said there are both strengths and weaknesses in terms of the global backdrop. While the tighter US labour market could potentially be a headwind, he said there are positive fundamentals playing out elsewhere across the globe.
“The strong majority for Macron in France is seen as positive for reform and growth in France. This is very important for Europe,” he pointed out. “In fact, Europe looks a lot better as the risk premia is reduced. The prospect of political tail risks threatening the strength of the banking system look to have diminished.”