Should you pile into the Footsie or run for the hills?

With the 7,000 mark in reach, investors must ask if the index will keep climbing or peak and plunge, writes Simon Read
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The Independent Online

With the Footsie climbing to a 14-year high last month and hovering close to that level this week, speculation is rising that the blue-chip index could finally be about to break through the 7,000 barrier.

Some will view this as a strong indicator that the market rally really will be sustained. However, it could also prove to be the tipping point at which investors sell out.

While some experts suggest that now is the time to be fully invested in the market, others warn of being too exposed to the risk of a major correction.

Darius McDermott of Chelsea Financial Services remains wary. "In the short term, I believe any sustained market rally needs to be driven by the mega caps – the top 20 of the FTSE 100," he said. "There is little evidence yet that this will happen, apart from a slight pick-up in M&A."

Others are more bullish. "I am optimistic that the FTSE 100 will breach 7,000 before the end of this year," said Stephen Bailey, co-manager of Liontrust Macro Equity Income Fund.

Julian Chillingworth of Rathbones is equally positive. "The market has clearly entered a new phase, encouraging investors to recycle money out of the high-growth, high-valuation stocks into cheaper areas that have lagged the bull market," he explained.

Contrarily, Richard Buxton of Old Mutual believes it may take longer for the Footsie to pass 7,000. "Whether we breach this huge milestone in 2014 or 2015 rests largely on how long it takes for this economic growth to feed through into positive profits surprises and earnings upgrades," he said. "Until then, stand by for more months of busily going nowhere."

Confused about whether to back the market, or flee from it? It's ever been thus. Max King, portfolio manager at Investec, points out that many investors were caught out by the dramatic drop in stock markets that followed the collapse in the technology-led boom in early 2000 – and abandoned equities.

Equally, others abandoned the markets when they crashed in the financial crisis. "So investors will now be wondering whether a new high means that it is safe to go back in or whether it marks the latest peak of a roller-coaster ride," Mr King said.

His conclusion? "The valuation of the FTSE 100 is lower now than in 1999 but the quality is probably higher," he said.

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