Can The FTSE’s Good Times Keep Rolling?
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The FTSE is “having a ball”, says Jeremy Warner in The Independent. Britain’s blue-chip index has hit a fresh four-year high. After its best summer showing since 1997, the index has now gained 14% this year. Yet at the same time, the economy is expanding at its slowest pace in 12 years; house prices have slid for 15 successive months, according to Hometrack; and the high street is suffering its worst trading conditions since 1983.
One reason for the index’s performance is that the global economy, which remains robust, has a greater influence on the market than the domestic economy, says Hilary Cook of Barclays Capital in The Sunday Times. UK firms, excluding banks, generate more than 66% of sales outside the country.
Then there’s Britain’s above-average weighting in oil stocks, which account for 20% of the index. And buoyant profit growth has spurred a series of share buybacks and a merger boom. According to Citigroup, the cash bids and buybacks seen in the FTSE All-Share this year amounted to more than all the inflows into UK equity funds over the past ten years. “That’s why the market is going up.”
So can it keep going? There is probably still mileage in the mergers and acquisitions boom, says Heather Connon in The Observer, while the market’s valuation remains reasonable at about 13 times earnings.
Still, a market can decouple from the economy, but it can’t “operate exclusively outside it”, says Philip Stafford in the FT. The banking sector comprises 20% of the index, and looks vulnerable to a decline in lending amid a weakening housing market, says CSFB, which cites retailers and banks as the reason why the UK is its least favourite non-US market. As we said a few weeks ago, most of the index isn’t helped by higher oil prices, which presages a cloudier profit outlook as high energy prices feed through to corporate costs.
Higher energy costs also dampen the all-important global outlook; given the persistence of higher oil prices and the prospect of further US rate hikes, some downgrading in the outlook for economic growth and corporate earnings seems likely, says Mike Lenhoff of Brewin Dolphin. There’s also the danger posed by the prospect of a US housing bubble bust and America’s highly indebted consumers – who have been showing signs of running out of steam – to consider. While the FTSE may party on for now, the longer-term outlook is far from spectacular
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