Every dog will have its day and here comes the FTSE 100 index, not so much soaring as limping to a record high of 8,076. If that sounds too grumpy, consider that the previous record, 8,047, was set in February last year. In the 14 months it has taken the UK’s premier index to regain its old record level, the S&P 500 index in the US has marched upwards by 22% – and done so in a straight line, more or less, until a slip in the past fortnight.
Also note that the Footsie’s latest push above 8,000 carries a heavy flavour of currency effects at work. The US dollar has been strengthening against most major currencies, including sterling, as markets look at the persistence of inflation in the US and judge that the Federal Reserve may not cut interest rates this year (and could even raise them).
Since 75% of the aggregate earnings of Footsie companies are made in foreign currencies, primarily the US dollar, there is a simple beneficial conversion effect when those profits are expressed in pounds and pence. Rises in the sterling-denominated share prices of Shell and BP, two big dollar earners, account for half of the Footsie’s gains this year.
Thus, as ever with indices, remember that they are no more than the sum of their parts. The Footsie is not a symbol of national economic virility; it is just a collection of the 100 largest companies listed in London (weighted by value) and includes more than a few (try the Chilean copper miner Antofagasta or the US hedge fund Pershing Square) that have few real ties here. Even Shell, the biggest company of the lot, makes less than 5% of its profits in the UK.
But here’s a more uplifting thought about the Footsie and the UK market: valuations still look remarkably cheap compared with international comparators. When Goldman Sachs’s analysts did the arithmetic earlier this month, the UK market was priced at 11.3 times expected earnings over the next 12 months, which is near the bottom of its range over the past 20 years.
The figure compared with 21.4 times for the US market, and 18.6 times if one removes the pumped-up big tech brethren from the calculations. Japan, after a storming recovery for the Nikkei index over the past year, was on 15.7 times forward earnings and Europe on 13.7 times.
Does the UK market deserve such a discount? Perhaps, if you believe an over-weight exposure to oil companies, miners and banks is just too boring or too Jurassic. But there is also a fair argument that dullness can be a relative virtue when the geopolitical temperature is high. All those sectors – including most of the banks these days – generate piles of cash for share buy-backs and dividends.
And, for the purely domestic element of the UK market, life doesn’t look too bad currently. The top retailers – the likes of Tesco, Sainsbury’s, Marks & Spencer and Next – have all turned in good numbers in recent weeks. The election of a pro-business Labour government holds few fears for investors. And the spate of US-led takeovers for FTSE 250 companies – think the logistics firm Wincanton and the building products supplier Tyman – suggests historic low valuations in parts of the UK market are being noticed abroad.
None of which guarantees that the Footsie will stay above 8,000 this time: most obviously, the dollar-pound effect can reverse, as it did slightly on Tuesday afternoon after the lunchtime warning from the Bank of England’s chief economist about the dangers of cutting UK interest rates too soon. And investors everywhere may be far too relaxed about Iran-Israel tensions. Best to stick to assessments of relative market value, on which score the UK looks cheap. But it has done for a while: a new high was overdue.
