Don’t let the FTSE record high scare you: strategist

The FTSE 100 closed at a new record high, exceeding the previous record high it had set on December 30, 1999. And suddenly, taxi drivers in London can be heard once again saying that they’re thinking about investing in shares.

The index rose on Tuesday in step with European markets after eurozone finance ministers approved reforms promised by Greece to get a four-month extension of its bailout.

The FTSE 100’s new closing record high is 6,949.63. The previous closing record, set at the height of the dotcom book, was 6,930.2. Earlier on Tuesday, it also set a new intra-day record high of 6,958.89.

As the index pushed against the old record, some prophets of doom rushed to warn about froth in the stock market.

But strategists at HSBC argue that the FTSE record high is no harbinger of stock market crash.

If anything, the FTSE’s history shows that it tends to perform even better after hitting a record. Since it was launched in January 1984, the index has made 329 all-time highs, HSBC strategist Peter Sullivan said in a market note.

The average 12-month return following these highs was 8.1%, while the index’s average return since 1984 is 6.4%. The two-year return of the index following an all time high is “even more impressive,” at 19.2%, Sullivan added.

Not that the record in itself is relevant in any way. The HSBC strategist points out that the FTSE 100 is just a price.

“To say that prices are higher today than they were in the past is about as meaningful as saying that the price of bread or beer is higher than it used to be,” he said, pointing out that in real terms, the FTSE 100 is 29% below its all-time high.

FTSE 100 Record High

The FTSE 100 hit a record high in nominal terms but is far from it in real terms. Source: HSBC

Valuation is another way to check whether an index is too appreciated and here the FTSE is far from its high. The trend-adjusted price/earnings ratio and the prospective price earnings ratio are both below average, as earnings are 99% higher than they were in 1999.

“It is almost a buy one, get one free market compared to 1999,” Sullivan said.

Another factor that makes the comparison with the previous record irrelevant is the fact that the FTSE of today is not identical to the one at the turn of the century.

IT and telecoms, for instance, made up 22% of the index in 1999 but represent only 6% today, while the share of consumer stocks increased to 28% from 16%.

For those still thinking of dumping the index, the question is: where else would you invest?

The FTSE 100 offers a prospective dividend yield of 3.9%, more than double the level of comparatively safer 10-year gilts, which have a yield of 1.76%.

Sullivan notes that the last time the FTSE hit a record, its dividend yield had fallen to 2%, while the 10-year gilt yield was 5.5%.

“With the dividend yield above the bond yield, it’s not inconceivable that the FTSE could offer an attractive return relative to bonds even if it goes nowhere for the next 15 years,” Sullivan predicts.

The big unknown, of course, is the May election in the UK. In which case, European equities – and especially the French ones — offer a good refuge from the harm that UKIP could do.

Judging by how volatile things could become, iInvestors may need to wait another 15 years for new FTSE record high.


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