THE BULL run on the London stock market looks set to continue next year as a raft of analysts and investment groups predict the FTSE 100 will follow its peers in the US and Europe to record highs.
Germany’s Dax joined American indices such as the Dow Jones and the S&P 500 to reach unprecedented levels last week, but the UK’s benchmark index has been lagging.
In their predictions for 2014, analysts have pointed to the opportunity for the Footsie to catch up, with some saying it could go as high as 8,000 and all-time highs expected to be tested in the coming months.
Fuelled by a late “Santa rally”, the index is currently sitting about 1.6 per cent off its 2013 closing high of 6,840, which was just over 100 points from its best ever valuation at the time of the dot.com boom in 1999.
Will Hedden, sales trader at IG, said: “The Santa rally came late but now the FTSE is grabbing hold of the Dow and the Dax and getting pulled along.
“It feels like only a matter of time before we surpass the October high, and might make it there before New Year. Then with the all-time high around 6,950, it seems reasonable that this could be hit during the first quarter of 2014.”
Among the financial institutions releasing forecasts, Capital Economics predicted the FTSE should pass 7,500, while CitiGroup is confident it can test 8,000.
The FTSE 100’s relative underperformance in 2013 may seem surprising given that official figures suggest Britain has been the best performer among the developed economies in recent months.
However, that has led to a strengthening of the pound, which has gained around 10 per cent against the dollar since the summer. That makes UK shares more expensive to foreign investors and makes the overseas earnings of London-listed companies appear smaller in sterling terms. The FTSE 100 Index, up some 14 per cent in 2013, has lagged a near 17 per cent rise on the pan-European Stoxx 600.
Some investors have been wary of investing at a time when stocks are closing in on their record highs. However, experts say that compared to revenues and earnings, shares are still only modestly valued.
The FTSE 100 trades on a 12-month forward price to earnings ratio of 12.4, against its 15-year average of 14.6.
Atif Latif, director of trading at Guardian Stockbrokers, said: “[The FTSE 100] remains – versus historical valuations –still undervalued, and with the FTSE still lagging behind the EU markets we see relative outperformance into the first quarter of 2014,” said.
Calum Brewster, head of Scotland and Northern Ireland for Barclays Wealth, also believes equities are at historically modest valuations, especially given the relatively low yields available from cash or bonds.
However, he expects the London market’s international exposure to hold it back relative to European peers.
He said: “The domestic economy is definitely picking up more visibly. This growth will be a good thing for certain parts of the equity market, in particular those sectors with first-line exposure to the domestic consumer and the residential housing market.
“However, the reality is that global markets are a more important influence on the FTSE given its high exposure to energy and materials, along with other multinational sectors including Asia-focused banks. As a result, we retain a more cautious view on the UK equity market relative to its developed market peers.”