24th February 2015
The FTSE 100 has reached an all time high rising 46 points to 6,958. The move was supported by rising mining stocks, the reasonably good news of a short term agreement between Greece and its creditors and bullish comments about the US economy by Federal chair Janet Yellen.
This is higher than the last record of 6,950 set on the final day of trading in 1999 back in the midst of the dot.com boom.
Laith Khalaf, senior analyst, Hargreaves Lansdown said: ‘It’s a red letter day for pension funds and stock market investors as the FTSE finally returns to the level it reached in December 1999. At the time the dot com party was in full swing, interest rates were at 5.5% and the average house cost just £75,000.
“Fast forward to today via the tech crash and the financial crisis, and the UK stock market has been propelled through its previous high by the global economic recovery and the vast money printing programmes of central banks.
“But that doesn’t automatically make it a good time to sell. The current level of the FTSE is underpinned by company profits to a much greater extent than it was in 1999. The economic backdrop is also encouraging for UK companies, with low interest rates, low inflation, and growth forecasts rising.”
Khalaf also emphasises that investors have made a 67% gain from the FTSE 100 since 1999 when reinvested dividend income is considered.
Tom Stevenson, investment director at Fidelity Worldwide Investment, added: “It’s been a long wait but the FTSE 100 has finally closed above its 1999 peak of 6,930.2. This is a watershed moment. Investors have finally exorcised the ghost of the dot com bubble which has haunted the market for a decade and a half. Of course, what matters is not the actual level of the market but the value it represents. In 1999 shares were grossly overvalued. Today, thanks to rising profits over the years, UK shares are reasonably priced – not cheap but by no means expensive.”
Laith Khalaf has looked in detail at the FTSE’s performance over the past 15 years and provides an overview of the stand-out companies and sectors as well as how the index compares to other market measures…
FTSE is 50% cheaper than in 1999
If you look at the price/earnings ratio of the market, the FTSE 100 is actually 50% cheaper now than it was in December 1999, analysis by Hargreaves shows.
The current P/E of the UK’s largest companies currently sits at 16 times earnings, according to Khalaf. This compares with the dizzy heights of almost 30 times earnings reached in December 1999. The long term average is 15 times earnings.
It is tempting to think a new peak in the market is a good time to sell, but investors shouldn’t get spooked by the FTSE 100 reaching new highs, explained Khalaf. “The headline index doesn’t tell us anything about how stock prices relate to company earnings, it is therefore a bit like a clock face without any hands,” he said.
When you factor in company earnings, the UK stock market looks close to its long term average. In other words the glass is either half empty, or half full, depending on your point of view.
Investors have made 75% since 1999
The FTSE 100 is the most recognised UK index, but it doesn’t include dividends, which form a major part of the returns enjoyed by stock investors, said Khalaf. With dividends reinvested the FTSE 100 has returned 67% since 1999.
The FTSE 100 also excludes the medium and smaller companies that make up around 20% of the UK stock market. The FTSE All Share includes these companies, and is the UK index which most tracker funds follow.
Including these medium and smaller companies, and dividends, the UK stock market has returned 89% since 1999. A UK tracker fund has returned 75% for investors, after charges have been deducted.
While the FTSE 100 is the most prominent barometer of the UK stock market, this total return figure for a UK tracker fund is the best representation of the growth a real life investor would have seen on their investment.
UK stock market data
Below Hargreaves shows the value of £10,000 invested in the various sections of the UK market in December 1999. The published figures for the FTSE indices do not factor in any charges paid by investors, so it has included the performance of two UK tracker funds to give an idea of the actual return investors and pension funds would have received.
FTSE vs cash vs bonds
So how have UK shares compared to other assets over this period? Here is the value of £10,000 invested in the stock market, in UK gilts, and saved into a cash account paying bank base rate.
Hargreaves has also shown the value of £10,000 uprated in line with CPI and RPI. In other words, this is the sum of money you would need today to buy the same amount of stuff you could have bought in 1999 with £10,000, so anything above this sum means you have increased your wealth.
A FTSE 100 tracker has beaten inflation as measured by CPI, but not as measured by RPI over this period. A FTSE All Share tracker has beaten both, and cash. An investment in UK gilts trumps all however.
There is some important perspective to maintain in interpreting results. Starting as we are at the peak of the market in 1999, we are selecting a very poor period for the UK stock market. We are also selecting a very flattering period for bonds, which starts with a prolonged flight to safety and also included the global financial crisis and loose monetary policy that has driven gilt prices to historic highs.
Biggest FTSE stocks and sectors- 1999 to 2015
HSBC and BP still remain in the index, whereas Glaxo Wellcome became part of what is now GlaxoSmithKline. BT and Vodafone remain in the FTSE 100 but their weightings are 2.0% and 3.5% respectively.
Together technology and telecoms companies made up more than 20% of the FTSE 100 in December 1999. They now make up just 7%. The now defunct telecoms and engineering company Marconi was the 10th biggest stock in the FTSE 100 in December 1999, constituting 2% of the index, shortly before it collapsed.
The most obvious winner over the period is mining stocks, which now account for almost 7% of the index, up from 3% in 1999.