The FTSE 100 has just gone through its weakest start to the year since the financial crisis in 2008. The hefty drop in the price of Brent crude, data showing a fall in US wages, the election in Greece and the prospect of the UK going to the polls all played a part in unsettling investors.
However, less than two months later, the FTSE 100 is phenomenally close to breaking its all-time intraday high of 6,950.6, which was hit on 31 December 1999 as a result of the dot com boom.
Early in today’s session the blue-chip index rose above the 6,900 mark, although it has come back a little since. The FTSE has gained 5 per cent this year and is up 141.84 per cent since the market bottomed out in March 2009.Performance of index since market bottom
Source: FE Analytics
While it is easy to become swept up in the optimism, there have been several occasions when the FTSE 100 has soared to heady heights, then retreated as quickly as it rose.
Only last week, the UK blue-chip index surged and then fell, following the unsuccessful Greek debt negotiations. With many other global economic difficulties on the horizon, the FTSE 100 could now potentially be teetering on the brink of change.
Jason Hollands, managing director at Tilney Bestinvest, said: “The key drivers for markets in the near term are likely to be how things play out between Greece in its Mexican standoff with European troika and whether this triggers a Greek exit and whether the fragile ceasefire in Ukraine collapses.”
“Further out, markets could be too sanguine about UK political risk - a hung parliament in May would likely prompt a very negative response from international investors, leading to a sell-off in sterling and UK stocks.”
Hollands also highlights the market’s reaction to the Scottish referendum as an example of how badly markets can respond to uncertainty. Last September, sterling dropped 0.5 per cent to $1.653, which was not far off a five-month low hit in late August of the same year. The euro also became 0.4 per cent higher against the pound at 79.36p.
Graham Spooner (pictured
), investment research analyst at The Share Centre, said: “There’s that old phrase that the market climbs a wall of fear. Over the last six months there’s been a large number of growing concerns, so there must be a correction. Therefore, an increasing number of people think the market will be volatile.”
“I see the election looming; I look at the market over the last year or two and it hasn’t been that much headwind in terms of the FTSE. I’m inclined to think that there’s quite likely to be a correction rather than any motoring ahead.”
Spooner also believes that we could see a sideways market over the next few months. When QE in Europe is far behind us and if other markets such as the Chinese economy continue to slow, it’s not difficult to see why the FTSE’s rise could pause.
“Stock markets have already risen a long way,” said Patrick Connolly, head of communications at Chase de Vere. “Strong stock market performance should be seen as a warning sign rather than an invitation to buy and investors need to be wary of jumping in after gains have already been made.”
Connolly adds that company earnings must be improved to justify valuations and that it is now more challenging to find real value.
Last year the number of profit warnings increased significantly, according to E&Y, resulting in the highest number since 2008. FTSE 100 companies also issued more warnings in 2014 than at the height of the financial crisis.
In light of this, the question is perhaps not whether the FTSE 100 will exceed its all-time high, but how long its current strength can last.
Meera Hearnden, senior investment manager at Parmenion, believes that wage growth needs to be stronger in order to sustain a high index rating.
She said: “The FTSE 100 has had a good run over the last month, but I believe there are many headwinds for the UK economy this year.”
“The elections are likely to cause some uncertainty which in turn may cause higher volatility. Although the low oil price will benefit consumers, this is having a detrimental impact on inflation and GDP growth could struggle in the short term.”
“Wage growth also needs to be stronger. Therefore lower GDP growth and political risk could remain headwinds for at least the first half of this year.”
While this may be the case, other commentators point out that the FTSE currently looks attractively valued compared to its own history.
The current price/earnings (P/E) ratio of the UK’s largest companies sits at 16 times. This is nearly half of the P/E seen in December 1999 and close to the index’s average long-term P/E ratio of 15 times.
Laith Khalaf, senior analyst at Hargreaves Lansdown, said: “It is tempting to think a new peak in the market is a good time to sell, but investors shouldn’t get spooked by the FTSE 100 reaching new highs.”
“The headline index doesn’t tell us anything about how stock prices relate to company earnings, it is therefore a bit like a clock face without any hands.”
“When you factor in company earnings, the UK stock market looks close to its long-term average. In other words the glass is either half empty, or half full, depending on your point of view.”
While trying to predict short-term market movements could be likened to tossing a coin, general opinion seems to lean towards the prospect of the FTSE 100 reaching a new high, even if it could only be short-lived.
Hearnden believes that there is a likelihood that the blue-chip index will pass through its all-time high if companies report positive results.
Hollands shares a similar sentiment. He said: “With 7,000 points tantalisingly close it’s entirely possible we could see the index hit a new high. This might well trigger some profit taking both by fundamental investors as well as automated selling by quant funds.”