The UK stock market has been on a rollercoaster ride in recent years. After reaching record highs a few years ago, the market plunged a few months later amid concerns about a global trade war and slower economic growth. However, the market has since recovered and is now trading near its all-time highs.
The UK stock market comprises several different markets, the largest of which is the London Stock Exchange (LSE). The LSE is home to some of the world’s largest companies, including HSBC, BP, and GlaxoSmithKline.
In recent years, there has been quite a lot of political and economic uncertainty in the UK. This uncertainty has led to volatile conditions in the stock market. However, some factors suggest the market could continue to rise in the coming months.
The UK economy is now in a period of transition. After years of growth, the economy faces some headwinds, and the pandemic has created a great deal of uncertainty, weighing on economic activity even as lockdowns cease and normal life resumes.
What is driving the stock market?
Several factors are driving the stock market higher. First, the country’s economy.Economic growth boosts corporate profits, which is one of the main drivers of stock prices.
Second, interest rates also affect stock share prices. Low-interest rates make it cheaper for companies to borrow money and invest in their businesses, and this is one of the reasons we’ve seen such a strong rally in the stock market since the financial crisis.
Third, few alternative investments are offering as much return potential as stocks, which draws traders in. With bond yields at historically low levels, many investors turn to stocks in search of higher returns.
What could go wrong?
Despite the positive factors driving the stock market higher, several risks could cause the market to fall.
First, the global economy seems to be slowing down in general, and a large part of UK companies rely and depend on global vendors, business partners, and clients, to keep revenue (and therefore, stock prices) high. If the global economy slows down further, it will likely drag down corporate profits and stock prices.
Second, valuations are high. The stock market is currently trading at around 18 times earnings, which is well above its long-term average of 14 times earnings, which means that stocks are relatively expensive and may be due for a correction.
Third, there is the potential for a continued trade war between the US and China despite calls for truces from President Joe Biden. At this rate, it could continue to hurt the global economy and corporate profits, which would drag down stock prices when suppliers find difficulty importing and exporting goods at reasonable prices and efficiently.
Why should you invest in the UK stock market?
There are several reasons to be bullish on the UK stock market despite the risks:
The economy is doing well.
Interest rates are low.
Few alternative investments offer as much return potential as stocks.
The bottom line
Despite the risks, the overall outlook for the stock market remains positive. The UK economy is doing well, with low-interest rates, and few alternative investments offer as much return potential as stocks. However, investors and traders should keep an eye on the risks listed above as they could cause the market to fall in the short term. Finally, beginners are advised to use an experienced and reputable online broker such as Saxo Bank before trading stocks in the UK. To find out more, use this link.