The FTSE 100 has jumped 10 percent so far this year, making it by far the best performer among the major European indexes in local currency terms, but it has lagged in dollar terms - something that history shows could reverse in coming months.
In a ranking of the largest 20 equity markets globally based on dollar returns, the FTSE comes a below-average 12th, up just 1.7 percent and significantly lagging U.S. equities, which have rallied nearly 10 percent, according to Thomson Reuters DataStream.
The British currency has fallen nearly 8 percent since the start of January, against the dollar and around 6 percent versus the euro.
"There are so many problems lined up - political, credit ratings, the economy - everything points south for sterling at the moment," said Neil Mellor, FX strategist at Bank of New York Mellon.
To a certain extent, sterling weakness has been due to expectations that the economic weakness will prompt the Bank of England to adopt further monetary easing measures - in itself a positive factor for equity markets.
In addition, the weak currency boosts sterling returns for UK-listed companies with earnings in U.S. dollar and is good news for the index at large, prompting analysts at Goldman Sachs (NYSE: GS-PB - news) to raise their targets for the FTSE 100 (FTSE: ^FTSE - news) this week, to 6,800 in six months and 7,200 in 12 months.
Historically, they note, "when sterling is strong the FTSE 100 is strong in dollar terms, whereas when sterling is weak, as it has been in recent months, then the FTSE 100 is weak in dollar terms underperforming other world indices".
"But this impact fades and after 5-6 months and turns the other way, maybe as corporates prove to have stronger earnings as a result of their overseas income," Goldman's analysts add.
"In the context of Europe we have a preference for UK equities."
Over two-thirds of the FTSE 100-listed corporates' are non-sterling-based and 45 percent of dividends are paid directly in dollars, Goldman's data shows.
Reuters messaging rm://david.brett.thomsonreuters.com@reuters.net
