10th March 2015
Rowan Dartington Signature’s Guy Stephens takes a look at the UK equity market and assesses what is on the cards over the coming months…
The UK equity market is not displaying a convincing performance having made a foray into record territory. It set a new all-time high on 24 February, as widely reported in the headlines, by a whopping 20 points! It then built on this two days later by adding 0.1 of a point and then on 5 March by adding a further 11 points. So, in summary, we have broken the previous high by 31 points – not terribly convincing.
The chartists will have a field day with this by quoting triple tops which show significant resistance and so the downside is considerable. There are also a plethora of bearish articles around at the moment that appear to link the record level of the FTSE-100 with a reason to sell, without putting the market valuation into context historically with any meaningful argument. History can provide some guidance as to where we go from here.
When the equity market last peaked on 30 Dec 1999, this was a text book example of travelling and arriving where all the hype of the technology bubble culminated in a market peak, just before the end of the millennium. The Y2K bug was supposedly going to lead to planes falling out of the sky and widespread computer malfunction, none of which actually happened. It was a bizarre time with market valuations of 20+ times price/earnings compared to today’s 15 times with a significant majority of bulls in the market who believed the internet was going to revolutionise our world and wealth.
What is particularly interesting is that within six weeks of attaining the market high, the FTSE-100 had lost 13%, losing quite a chunk of this in the two weeks that followed the high. The market then staged a rally that didn’t quite reach the previous high and then by mid-April it had fallen below 6,000. It staged a further strong rally in September of that year, but then as the reality of the bursting of the technology bubble set in, it wasn’t long before it was testing 5,200 on its way to halving over the next couple of years to March 2003.
Today’s markets are very different. One view is that the market is consolidating and getting comfortable with the concept that it could very easily rise above 7,000 which will then become a floor rather than a ceiling, as it is now, but it will need more convincing for that to occur. There is currently a lot of external noise causing investors to be hesitant.The Greek problem has only been delayed rather than solved and Putin is as unpredictable as ever, but for now, these destabilising issues are less intense.The bigger looming issue in the UK is the forthcoming election which is building up to be a major cause of cautionary influence not unlike the US shutdown of Congress when they failed to agree their budgets. The balance of power is going to most likely come from the Scottish National Party which has already ruled out any deal with the Conservatives. If a coalition between Labour and the SNP is returned, then we may not see these records for some time as the markets try to digest what this actually means for the investing climate.
We always said the first half of 2015 was going to be a testing time with lots of external influences. It is particularly galling that just when the economy is growing well with an oil price kicker to discretionary spending, we now foresee a realistic chance that the least palatable electoral outturn for the markets could well be returned. The calls over the weekend for the Labour party to rule out a coalition deal with the SNP is evidence of the panic starting to pervade within the Conservatives. The rhetoric is only going to build from here as we approach May 7 and with it the nervousness in the markets.Focus on fundamentals is going to be very blurred over the next two months and therefore a decisive move above 7,000 is unlikely.