IN 1999 the FTSE 100 came tantalisingly close to breaking through the 7,000 mark. Could the conditions now be in place to pass that threshold, asks Dominic Jeff
It was no ordinary end to the working week. As factories and offices prepared to close down for the start of the nationwide Millennium celebrations, traders on stockbroking floors were in party mood for a different reason.
On 30 December, 1999, they were glued to their screens as the FTSE 100 crept up to 6,950, an all-time high. Could it push through 7,000 before the last trading session of the century? They were to be disappointed when the market edged lower to close the week at 6,930.
However, in spite of the bull run, fuelled by the boom in dotcom stocks, that figure remains the all-time high. In fact, within months the dotcom boom would turn to crash and three years later the Footsie would plummet to 3,287.
Over the last decade there has been much talk about it ever reaching such highs again, only for it to suffer further falls. Last Monday, however, it touched 6,865, its highest close since 1999, prompting more excitement on trading floors that the 7,000 threshold was once again within reach.
They are now betting on it happening some time soon, driven by low inflation and interest rates, and a recovering economy.
However, at least three times in the last year the move higher never ended up happening because British investors apparently bottled the assault on all-time highs that their US counterparts have long-since breached.
The high point is seen as a key resistance level that the market has to breach if it is to carry on into the 7,000s – as some analysts were happily predicting two months ago in their New Year forecasts. Many were even more bullish: Capital Economics predicted the index should pass 7,500 this year, while CitiGroup was confident it could test 8,000.
But just as the late Santa rally which persisted into January looked set to carry it through to 7,000, a crisis broke out in emerging markets and it fell back by almost 10 per cent. And after recovering that ground in February, relatively obscure worries over China again derailed the charge.
Now some analysts think telecoms giant Vodafone’s $130 billion (£78bn) sale of its stake in US joint venture Verizon Wireless to partner Verizon could be the catalyst the market needs. The British firm is returning about £50bn to investors in the form of a special dividend.
While the majority has been settled in Verizon shares, about £16bn will be paid in cash and is due to land in shareholders’ pockets on Tuesday. Many are expected to re-invest the money in other high-yielding British companies. Oil majors BP and Shell are among the “income stocks” expected to be in demand. British investors are also likely to sell their Verizon shares over the next few weeks and re-invest them in London, where a string of well-timed flotations will be competing with the blue chips for a share of the bounty.
Set against Vodafone’s largesse are a number of factors that could drag the London market down and push talk of testing new levels out of traders’ minds for the foreseeable future. David White, a trader at Spreadex, thinks the index will only keep making gains given a delicate balance of the right conditions.
“Earnings need to surprise to the upside, money needs to remain cheap, and the things markets are worried about need to not happen,” he said.
Top of the risk table is an unexpected tightening of monetary policy by one of the major central banks. The Bank of England is expected to be the first to move, but that is not expected until next year. The main threat is therefore a much more rapid tapering than expected from the US Federal Reserve, but with the dovish Janet Yellen installed as its new chair-person that seems unlikely.
There is also the possibility of Britain’s listed companies simply not delivering the goods. The latest reporting season on the Footsie has been a mixed bag. Industrial firms GKN and Weir Group provided the kind of encouraging outlook statements that help the wider market, but HSBC pulled down the index with its considerable weight even after reporting a 9 per cent rise in profits to a staggering £13.6bn. The shares fell because the City was expecting even bigger numbers.
The advent of algorithmic trading by investment houses and hedge funds, as well as a vast resource of analysis and forecasts available to even the smallest investor at the click of a mouse, means that stock valuations are finely tuned. Many investors are holding shares on the basis of earnings forecasts for 2015, and therefore if companies do not live up to expectations by guiding their outlook higher they may find themselves out of favour.
But the market can also move higher based on sentiment – the “animal spirits” that determine what multiple of earnings investors are prepared to pay for a company – and White said markets appear to be in an upbeat mood.
“In Europe we are seeing a lot of fleeing of risk in the morning, but then buyers are coming back in after the US opens and indices are picking up, maybe not to where they opened but they are narrowing their losses.”
He says that is a strong sign that there are plenty of buyers in the market – just as the opposite pattern is usually taken as a bearish signal.
White says the gradual pick-up after a bout of panic selling when emerging markets hit turbulence in January shows a strong appetite for equities – there was capital which wanted to fill the gap. “The market is changing and it’s becoming more efficient. You have to take it on a day by day basis,” White said. “At the moment it’s not exactly expensive, it’s fairly priced. That’s not to say that it can’t become expensive and remain expensive.”
Although it has risen by more than 90 per cent since its post-financial crisis nadir in March 2009, in terms of the expected earnings of its constituent companies the Footsie’s valuation is only just returning to long-term average levels.
In fact, because it has been relatively static over the last few months the price to earnings (P/E) ratio has actually declined slightly to around 13 as inflation and the genuine improvement in the economy and company performance swelled profits.
In that respect, valuations are still far below their peak at the height of the dotcom boom in 1999, when blue chips traded on a P/E of almost 30 despite a higher interest rate environment. But the index also came close to those highs in the year before the financial crisis, and on both occasions it lost almost half its value in the ensuing retreat.
Fears over a meltdown in emerging markets, partly due to a wave of political unrest and also because the Fed’s mild tapering is causing money to be pulled out, are the latest bogeyman for those concerned at the prospect of another major sell-off. But developed world stock markets have proved capable of shrugging off such shocks over the last two decades.
John Truong, senior trader at Accendo Markets, believes that with the global economy improving and investors now comfortable with the prospect of the US phasing out its money printing, it should only be a matter of time before the FTSE follows US indices to all-time highs.
He added: “If the markets can breach the highs of 6,930 then next resistance levels will be the psychological level of 7,000. If we surpass 7,000, the next question to ask is where we go from there? Along the way, stumbling blocks like traders taking profits, technical traders shorting position and ‘market bears’ might be short-term influences for resistance to the upside.”
• Additional reporting: Terry Murden