Professional, Investor: OK, we've hit 6,000 - now curb your enthusiasm
Saturday 25 March 2006
The FTSE 100 index's breach of the 6,000 level has given rise to much excitement. Indeed, three years on from the market low of March 2003, one commentator has even raised the possibility that the UK's premier stock-market index is on course for the giddy heights of 10,000.
Before we get swept away by the excitement that now surrounds the London stock market, it is worth taking a little time to examine how and why UK shares have rallied so strongly after a near three-year decline following the dot.com frenzy of the late 1990s.
First, it is important to point out that this is a global phenomenon. No major equity market has fallen in value over the three-year period since 12 March 2003. The FTSE 100 has risen by a little over 82 per cent during this period, but you don't have to travel far to find markets that have delivered far stronger returns.
In this same period, the DAX 30, the leading barometer of Germany's market, has risen by 167 per cent. Even France, now in the grip of mass protests, has been a stronger performer than the UK; its CAC 40 index is up by 114 per cent .
Investors willing to venture further abroad have enjoyed even better gains. Korea is up by 152 per cent, Brazil is up by 260 per cent and India's main market has rocketed by 269 per cent. This shows that investors around the world have had a strong appetite for risk. Second, it is worth looking at how the UK stock market has performed at a sector level. What stands out clearly is the performance of the industrial steels sector: prices of stocks in this sector have risen by more than 2,000 per cent over the past 36 months. Back in 2003, who would have thought that Corus - born out of a merger of British Steel and a Dutch rival - could be a "ten-bagger"; a share that rises more than tenfold?
Here is clear support for those commentators who have made the observation that the performance of the FTSE 100 owes less to the performance of UK plc or the domestic economy, and more to global factors.
There is no doubt that China's ravenous hunger for raw materials has helped to drive the rise of the market's top-performing sectors: construction and materials is up by 214 per cent, while mining is up by 176 per cent.
Surprisingly, the oil sector has underperformed the market, albeit by a narrow margin. Even though crude prices have hovered at around $60 per barrel, the sector is up by 78 per cent.
More interesting, perhaps, has been the lacklustre performance of the pharmaceutical sector, conventionally viewed as a defensive play at times of high market volatility. After food producers, pharmaceutical stocks - we hold Glaxosmithkline and Astrazeneca - have been the worst performers, at 59 per cent.
So what does this say about where the FTSE 100 index will go from here? Well, it plainly shows that global forces are driving the direction of the stock market, whether it is the investing community's attitude to risk, or the emerging Asian giants' appetite for raw materials. And, even if you could be sure what China's demand for steel was going to be in five years' time, this would clearly not help in determining whether the FTSE will be at 10,000 or 5,000 in 2011.
What is clearer is that we are closer to the end of the bull market than to its beginning. The latest UK rally has already outlasted the average bull-market run. Since the 1960s, only two periods of rising shares have lasted longer. We are also seeing activity more closely associated with the top of a market than its bottom, such as the burst of mergers and acquisitions in the past 12 months.
There is little point in making forecasts about market directions. Fund managers can add more value at the stock or fund level; by identifying companies with superior growth prospects or companies whose fundamental value has not yet been appreciated by the market, fund managers have a far better chance of producing good returns for their investors.
In any event, to ask where the FTSE 100 will be in five or 10 years' time is to ask the wrong question. What savers should ask is: why should I invest my money in the stock market? Past performance is, of course, no guide to future returns.
Yet the lesson of history is patent: equities remain the best source of returns for the saver who is willing to take the long-term view.
Chris Ralph is a portfolio manager and UK analyst at Fidelity International. Derek Pain is away.
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