Earlier this month the FTSE 100 briefly broke its highest level of 7,104. This could be seen as a great sign of the strength of the UK economy, but many experts are warning investors to steer well clear.
Here’s what you need to know.
The FTSE 100 is at a record high, isn’t that good news?
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It depends on who you talk to. Optimists argue that the FTSE 100 sitting above 7,000 - its been around or above that level for two weeks now - is a bullish sign for the UK economy.
“Here’s how the optimistic version goes,” says Oliver Kamm in The Times. “Stock markets are forward-looking. They reflect investors' best estimates at any moment of the outlook for corporate earnings. Over the long term, corporate earnings rise in line with nominal GDP. The market is looking through the present uncertainty about Britain’s trading arrangements post-Brexit and giving a vote of confidence."
What’s the other view?
On the face of it the FTSE 100 is soaring but a large reason for that is the weakness of the pound.
"The pattern of the UK’s performance looks wholly different when viewed in dollar terms; the FTSE 100 is down slightly for the year," says John Authors in the Financial Times. All of that gap has opened up since the Brexit referendum in June, which initially caused stocks to fall globally. Stocks in the US made a full recovery; stocks in the UK did not, unless you measure them in the UK’s depreciated currency.”
This looks more critical when you consider that around three-quarters of the revenues of FTSE 100 companies are earned in dollars. So they're actually rising because of the economic fallout triggered by the Brexit vote, not in spite of it.
As well as currency issues the FTSE’s rise is shaky when you look at the fundamentals. The FTSE 100 trades at a huge 69 times trailing earnings, a level that was only exceeded during 2009’s earnings recession and the height of the tech bubble, points out Authors.
Also, most of the gains are focussed on just a few stocks. Certain share prices have shown “eye-watering growth” this year,” says Laura Suter in The Telegraph. Anglo American’s share price has risen an astronomical 215 per cent, and its rival Glencore has gained 148 per cent.
Is it time to invest?
There is never a simple answer to that question, and now is no exception. Some bulls argue that the market hasn’t peaked yet. Laith Khalaf, senior analyst at Hargreaves Lansdown told the Telegraph that the fact investors are so jittery show that the market is still on the up.
“People are cautious about the market, no-one is gung-ho. There is about £160bn in cash accounts paying zero interest. People are wary of the market,” says Khalaf. “When you are in the pub and everyone is excited about markets and giving share tips, that’s the time to get nervous. I don’t think we’re anywhere near that.”
Others disagree. “Investors have been urged to sell British shares and reinvest the proceeds in other assets,” says Sutor.
One thing still drawing investors to the FTSE is income. But even that could be on the wain. As well as concerns about what soaring pension deficits might do to dividends there are other signs that dividends could be set to shrink. Investment guru Jack Bogle, founder of Vanguard, warned that dividend yields on US shares have dropped to two per cent from a long-term average of 3.5 per cent.
“While the FTSE 100’s dividend yield is substantially higher, the fortunes of our stock market tend to move broadly in line with Wall Street, implying leaner times ahead for British investors too,” says Sutor.
Finally, there are no bargains to be had in the FTSE 100 at present. “Anyone looking for solid value in the wake of the Brexit sell-off will be disappointed,” says Authors. “The rally since then, in local currency terms, has left almost nothing compellingly cheap.”
FTSE passes 7,000 milestone as pound sinks
4 October
The FTSE 100 has risen above 7,000 for the first time since May 2015 as sterling sank to a 31-year low against the dollar.
A lower pound benefits many of the share index's international members benefit as profits earned abroad by multinationals such as GlaxoSmithKline are worth more when converted back into sterling, prompting a revaluation of the stock.
The pound dipped to $1.2766 in early trading today - its lowest level against the US dollar since 1985. It has fallen for the past two days as nervous traders respond to Theresa May’s Brexit timetable.
Kathleen Brooks, of Forex.com and City Index, told the BBC foreign exchange traders were "spooked" by the Prime Minister's "apparent sanguine attitude to leaving the single market".
That anxiety had been increased by warnings from Chancellor Philip Hammond that the UK economy is heading for a "rollercoaster" ride over the coming years, she added.
However, The Times sounds a more optimistic note, predicting that September's UK manufacturing figures, which showed a surge in activity to the best level since June 2014, will reinforce confidence in the resilience of the economy after Brexit.
Lee Hopley, the chief economist at manufacturers' organisation EEF, said the "expectation-busting surge in manufacturing activity points to conditions across industry being considerably better than business as usual".
Stock markets in Frankfurt and Paris are also higher on Tuesday.
