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FTSE High: is the party over or just beginning?

Fund managers and brokers give their views on the signficance of the FTSE 100 surpassing its previous record peak set in 1999. 

 

by Gavin Lumsden on Feb 25, 2015 at 07:56

FTSE High: is the party over or just beginning?

It has taken 15 years but finally the UK stock market has broken through the peak it reached in the dot com bubble at the end of the 20th century. The FTSE 100 yesterday closed at 6,949.63 above its previous all-time high of 6,930.20 set on 30 December 1999. It promptly fell back below this level today but nevertheless it feels like a significant moment to take stock.

But what should investors make of this achievement? We've gathered the thoughts of fund managers and stock brokers to find out.

'Watershed moment'

Tom Stevenson, investment director at Fidelity Worldwide Investment: ‘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.’

‘Sweet distraction’

Matthew Tillett, Citywire AA-rated manager of Allianz UK Growth: ‘Falling employment, low inflation, the oil price and rising wages are helping to buoy consumer stocks and lend a feel-good factor to the London market. But investors shouldn’t get carried away and read too much into one read of the tape – it can be unhealthy to become too fixated on index levels. To invoke a line from Rita Coolidge’s James Bond theme, All Time High, the FTSE 100 level shouldn’t be anything more than a “sweet distraction for an hour or two”.

'Watching the day-to-day ticking up and down of indices is insensitive to the fact that investors should see equities as a long-term asset class and with the FTSE 100 so international in its nature these days, it’s a clumsy proxy for the overall health of the UK economy too. With an uncertain general election looming large on the horizon and ongoing concerns over Greece and Britain’s role in Europe, there is more volatility to come.’

Markets too high

John Bennett, Citywire AA-rated European fund manager at Henderson Global Investors: ‘I am not overly confident in the markets presently. US equities, the forerunner for global risk assets, are too highly valued. Political paralysis in the eurozone coupled with drag from financial repression and excessive debt means relatively low valued European equities are, in my opinion, not actually that cheap.’

Good news, no euphoria!

Max King, portfolio manager and strategist at Investec Asset Management: ‘It is more than 15 years since the FTSE 100 index peaked at a little below the magic 7,000 level on Millennium eve, 1999. Professional investors will dismiss the significance of that peak; including reinvested dividends, the FTSE 100 reached a new high at the start of 2006 and has returned a compound 3.4% since the 1999 peak. In capital only terms, the S&P 500 reached a new peak in mid-2007 and the world index in sterling in mid 2011. While the FTSE 100 has struggled, the FTSE 250 index has multiplied 2½ fold.

‘Still, the FTSE 100 index for all its imperfections remains the yardstick by which most people measure stock market performance, a role it took over from the FT 30 index more than thirty years ago. Many investors were caught out by the dramatic drop in stock markets that followed the collapse in the technology-led boom in early 2000 and abandoned equities. Many others abandoned stock markets when they again crashed during the 2008 financial crisis. They will now be wondering whether a new high means that it is safe to go back in or whether it marks the latest peak of a roller-coaster ride. Some comfort can be gained from valuations; both world markets and the FTSE 100 traded at over 30 times historic earnings at the 1999 peak but are barely half that now. However, the price/earnings ratio for both the world market and the FTSE 100 were lower than its current level in late 2007.

‘With the benefit of hindsight, it is clear that corporate profits in late 2007 were about to collapse (though they subsequently recovered quickly) and that investors were hugely complacent about financial risk. Is it different now? Analysts are collectively predicting high single digit earnings growth for this year and next, but they were also confident well into 2008. More encouragingly, bond yields are extremely low by historic standards, as are inflationary pressures, making a significant increase in interest rates unlikely. All economic rationale and evidence points to a continuation of steady growth. Management is more focused than ever on maintaining profits, paying dividends and creating value for investors. Investors, having been hit hard twice in a decade, are cautious and sceptical, scouring the world for bad news which threatens markets. Investors have recovered from despair but the euphoria that marked 1999 and 2007 is notably absent.’

Healthier markets

Laith Khalaf, senior analyst, Hargreaves Lansdown: ‘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.

‘However, risks still lurk in the background. The agreement reached in Europe is a sticking plaster to allow further negotiations to take place and may well flare up again. The UK election will also cause some thrills and spills, as markets weigh up the implications of potential outcomes. Despite the uncertainties, the long term case for equity investing remains robust. Even those investors and pension funds who put money into the UK stock market at the worst possible time in 1999 have seen a 75% return on their investment, if you take dividends into account.’

Beyond 7,000

Rebecca O’Keeffe, head of investment at online broker Interactive Investor: ‘With Greek reforms having staved off a potential crisis for the near term, and the weight of liquidity and lack of alternative options also driving people towards equities, investors will be hoping that the index can sustain its momentum and go through 7,000 and beyond. However, it should be noted that despite the fact that it has taken this long to reach new highs, the vast majority of investors should have made money over this 15-year period due to average dividend yields in excess of 3%.

‘In addition, less than half the constituent members of the FTSE 100 in 1999 remain in the benchmark index today. These changes have seen sector weightings within the index change dramatically, with technology and telecoms stocks now less than half the weighting they once were, while consumer goods and commodity focused stocks have experienced a dramatic rise in their share of the index. Investors in UK stocks have had the opportunity to benefit from the rise of new sectors over the past 15 years, giving them ample scope to outperform the underlying index.’ 

Best is past for now

Angus Campbell, senior analyst, FXpro.com: ‘The FTSE 100 has been lagging its peers but now it has finally cracked the nut. The fact that the US’s Dow Jones achieved this feat as far back as Q1 of 2013 and Germany’s Dax shortly after in the same year, shows just how far behind the UK’s benchmark has been when compared to other global indices. Investors exposed too heavily to UK blue chips have simply not seen as impressive returns in the past two years and there’s little to suggest that now we are above and beyond that all-time record high, things are about to get much better.

‘External factors such as a rapidly slowing Chinese economy and a US economy that has recently been showing signs of fatigue are not to be underestimated, coupled with the fact that the recent US earnings season disappointed. The ECB may just be starting its QE programme in earnest, but the Federal Reserve and Bank of England aren’t too far away from starting to tighten monetary policy. This does not mean that we won’t see the figure “7” in front of the index before long, but it looks as though the best gains have been made and further upside could be limited.’

14 comments so far. Why not have your say?

Mrhbeats

Feb 25, 2015 at 09:28

The consensus view is that there is no consensus.

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JohnR

Feb 25, 2015 at 18:09

Why is inflation ignored?

In November 1999 the FTSE 100 peaked at just under 9500 points, in today's money.

We are still some way off that all time high.

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Sinic

Feb 25, 2015 at 18:24

The FTSE 100 should in real value terms be somewhere approaching 11000 today compared with 6930 at the end of December 1999. Since dividends are not included in the FTSE 100 index there is no point in saying if dividends were included etc etc.

Fortunately many other market indexes, including the FTSE 250, have performed far better and the last fifteen years, although volatile have been most rewarding for many investors.

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Jonathan

Feb 25, 2015 at 23:21

JohnR

Exactly, 7,000 today is much less than 7,000 in 2006 and much much less than 7,000 in 2000.

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kenneth douglas

Feb 27, 2015 at 12:08

Bunf, bull and rubbish. Seven reports that tell us nothing.

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Patrick Napier

Feb 27, 2015 at 17:19

With paper money flooding the world something big must happen soon. Where to invest for safety is anybody's guess.

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Ian Craig

Feb 28, 2015 at 10:03

Perhaps the index is reaching for 7000 because our pound has been devalued (by QE, say) more than the other significant currencies. The value of international companies are intrinsic, and only loosely coupled to the currency they're priced in. Perhaps their shares are to become the 'bitcoin' of the future.

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Hotrod

Feb 28, 2015 at 12:47

I've got a problem with articles such as this: It's all Macro-economic head-in-the-clouds stuff. The reason the FTSE 100 crashed twice in the last 15 years has got sod all to do with the dot-com bubble since nearly all of the technology stocks which were pertinent at the time were not listed in the FTSE 100, in fact many of them were start up companies which could only be purchased on bulletin boards.

Also it must be remembered that the volume of shares traded by private investors is infinitesimal in comparison to institutional trades and make little or no difference to the level of the index.

The sudden drop in share values was caused by Pension funds, Insurance companies, Hedge funds, & Banks, simultaneously having panic attacks, and selling out of perfectly sound and viable businesses, regardless of the consequences, through their algorithmic computer programmes. Small wonder that the Serfs have been very wary of the Barons, and have been reluctant to trust them with their hard earned cash.

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TonyCl

Mar 01, 2015 at 09:47

Why on earth don't you discuss the FTSE250 - this has unfussily risen from ~6000 in 1999 to ~17000 in 2015. It looks pretty healthy - surely a better indicator of the overall economy.

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Tony Peterson

Mar 01, 2015 at 12:33

With record outflows from funds and yet a FTSE100 new high, does that not seem to indicate that investors are starting to invest directly in equities themselves?

I certainly hope so.

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TonyCl

Mar 01, 2015 at 13:44

I hope so too, funds are excellent for fund managers.

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CUEBALL

Mar 01, 2015 at 15:22

why even mention this? (for all the reasons given) not least todays index contain less than half those of 99 but more importantly is 'weighted' by market cap which is just stupid (AND ALWAYS HAS BEEN)

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Derek Woolley

Mar 01, 2015 at 17:54

Spot on Kenneth Douglas !!! With the World in the turmoil that it is even 70 reports would come up with differing thoughts.

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pete rich

Mar 01, 2015 at 18:48

FTSE High: is the party over or just beginning?

Answer: Just beginning.

Next.

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