20th March 2015
The FTSE 100 has broken above the 7,000 mark for the first time, setting a new record high.
The blue chip index moved to 7,004 on Friday afternoon thanks to gain in Wall Street – the first time it has hit this mark since the benchmark index was introduced in 1984.
Moving past the 7,000 mark is psychologically important for traders, but Tom Stevenson, investment director at Fidelity Personal Investment said it was not a cause for celebration.
“It’s been nearly 17 years since it first broke 6,000 on 1 April 1998 – a long wait for round-number watchers,” he said.
All rather disappointing long term
“The performance of the FTSE 100 is even more disappointing when you consider that the growth of the UK market has progressively slowed since its launch in 1984. While it took just three years to double the index between 1984 and 1987, it was nearly a decade for it to double again between 1987 and 1996. Even if the market races ahead from 7,000 to 8,000 it will have taken the best part of 20 years for it to double for a third time.”
Jason Hollands, managing director for communications at Tilney BestInvest says: “Although the Chancellor of the Exchequer will undoubtedly be pleased if the UK voters perceive the news that the FTSE 100 has ended the week on a new high as a resounding vote of confidence in this week’s Budget and his stewardship of the economy, the reality is that the latest spike in the market has little to do with domestic factors.
“It is more a result of the mighty US Federal Reserve’s latest guidance this week which has reduced expectations of a tightening of US monetary policy. For now, recently mounting concerns over the removal of liquidity on global markets have abated and the heat has been taken out of the Dollar rally. The good times of easy money are set to roll-on for a little longer, which has provided a relief to markets.
“It’s important to once again reiterate that the level of the FTSE 100 is not in itself a particularly useful way of measuring whether equities are cheap or expensive. The Index represents the combined market capitalisation (size) of its constituents and therefore an increase in the Index can reflect companies having genuinely grown over time, as well as new major international firms having joined the Index.”
What does it really tell us about share valuations?
Hargreaves Lansdown senior analyst Laith Khalaf, says: “This is a historic landmark, but as far as investors are concerned nothing has changed. The UK stock market still looks close to fair value when you factor in company profits, and that represents a relatively attractive proposition when you consider bonds look expensive, and cash is returning next to nothing. In the short term no-one knows which direction the FTSE will turn from here, and the UK election may start to make some waves in the very near future, but long term investors should still keep the stock market in their plans.”
Hollands also notes that share values are just a little bit above their long term average.
He says: “There are numerous ways to try and assess the value of shares, but the most common one is a measure called the Price/Earnings (P/E) ratio. This measures a share’s price relative to the annual profit earned per share. In 1999 at the height of the dot com bubble, the FTSE 100 was on a P/E of 27 times earnings, in large part due to very high ratings of technology and telecom companies, whereas now it is just below 16 times earnings. Current UK valuations are a little higher than the long term average but they aren’t astronomical either and certainly below those of US equities where the S&P 500 Index is on 20 times earnings.
“When drawing comparisons between the UK stock market now and at the peak of the dot com bubble in 1999 it is also vital to factor in the impact of inflation over the last 15 years. We estimate that once adjusted for inflation, as measured by the UK Consumer Price Index, the FTSE 100 Index would currently need to be at around circa 9,500 points to be comparable with its 1999 peak of 6,930 points. That’s a long way off where we are now.”
What could cause a big fall?
Matthew Hoggarth, Investment Analyst at Thesis Asset Management, says: “The first time the FTSE 100 closed above 6,000 was on April Fools’ Day 1998. Six months later it fell to a low of under 4,700 after Russia’s currency crisis and default and the failure of the hedge fund Long Term Capital Management caused investors to flee for safety. Sixteen years on, with the index now over 7,000 for the first time, are investors right to be wary of high valuations, or are UK equities still a good investment?
“There are several events which could cause an upset in markets’ rise during 2015. Interest rate rises are likely in the US. Europe could see a shock from the Greek debt negotiations or the bank reconstruction in Austria. Russia is also not without its risks. While gradual improvements in global economic growth should keep corporate earnings moving forwards and drive markets higher, there is no guarantee that we will not see market falls later in the year. Overall, the best advice is sometimes the most boring. Invest for the long term, choose companies and sectors that are better value than the overall market, or which have the potential to grow faster, and thoroughly research the risks before you invest.”
Outlook dull for returns?
Jeremy Whitley, head of pan-European equities at Aberdeen Asset Management, said moving past the 7,000 barrier could signal a period of strong corporate growth. “It’s rather appropriate that the FTSE 100 surpasses 7,000 on the same day as the solar eclipse plunged parts of the UK into darkness,” he says.
‘The stockmarket has been sunny for investors over the past two years rallying strongly. However, this has been driven not by an increase in earnings but by an inexorable rise in valuations. Consequently we may be in for a period of dull returns until there are visible rays of sunshine in terms of both improved economic conditions and most importantly corporate profit growth.”