Not long after its previous high, the FTSE 100 sold off over a period of three years and lost almost half its value, as shown in the graph below.
Performance of index 1999 to 2003
Source: FE Analytics
According to FE Analytics, since the FTSE bottomed out in January 2003 it has gained more than 200 per cent.
Performance of index since 2003
Source: FE Analytics
Other major developed stock market indices including the S&P 500 and Dow Jones Industrial Average have also reached record levels. As Tilney Bestinvest’s Jason Hollands points out, this appears to have left investors nervous about putting new cash into the markets as recent figures from the Investment Association show large outflows from equity markets from institutional investors.
“A number of high profile businesses have reported earnings setbacks, the UK faces an uncertain outcome from May’s general election and the news headlines have been dominated by a potential Greek exit from the Eurozone, terrorism and the conflict in Ukraine,” Hollands said, when highlight head winds.
Hollands also notes, however, that on the basis of the price/earnings ratio, there is a wide gulf between the heady days of 1999 and current valuations.
“The FTSE 100 currently on a 16 times multiple is higher than the longer term average – but certainly nothing like the 27 times multiple it sat at in 1999 as a result of astronomical ratings on tech and telecom stocks,” Hollands said.
Max King, portfolio manager and strategist at Investec, also points to valuations and fundamentals being very different today compared to 1999.
“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 FTSE100 were lower than its current level in late 2007,” King said.
“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.”
He says economic rationale and evidence points to a continuation of steady growth, which will be supportive for equity markets.
“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.”
Clive Ward, managing director for investments at Wesleyan, says equities remain “the best form” of long-term investment.
“It is always tempting to take profits or cut losses in the short term, [but] it usually pays to hold your nerve, especially during periods of stock market volatility like we’ve seen many times in recent years,” he said.
“In fact the FTSE 100 is only part of the story. Despite the fact that it is only back to where it was at the end of 1999 the return for most equity investors has still been reasonable due to a combination of dividend income and the fact that small and mid-cap stocks have significantly outperformed over the period.”
“Looking ahead, we continue to prefer equities over bonds. True, the short-term threat of deflation is real and growing, but central banks know they need to support economic growth through continued loose monetary policy. While continued ultra-low interest rates will also support debt markets, the long-standing bull market for bonds cannot last forever.”
Charles Hepworth, investment director at GAM, believes those taking the view that market is looking close to a fall have a “naïve view of the world”.
“The recent rally in the FTSE 100 index from the low in October last year has been impressive given the preponderance of oil-related companies within this index,” he said.
As the graph below shows the performance of oil stocks has had a material negative effect on the broader UK equity market, meaning any further recovery in the oil price would likely boost equity markets further.
Performance of indices since June 2014
Source: FE Analytics
Hepworth says investors often get psychologically attached to a market level, which is particularly evident in this case.
“It is understandable from a behavioural perspective, but completely illogical from a valuation perspective. The UK market is now better valued on price-to-book and price-to-earnings ratios than arguably it was in 1999, and even again in 2007,” he said.
“This justifies its current level from a fundamental analysis viewpoint. On a technical perspective I am optimistic that the market can make further gains from here with the FTSE 100 trading towards an upper range of 7500, and this level possibly being met sometime during 2014.”
Carl Baxter, stockbroker at Redmayne Bentley, who was working as a trader in 1999, says the atmosphere of the market is completely different now compared to the pre-high crash.
“You had some companies on 200-300 times earnings - valuations are not even close to that now,” he said.