To sell or not to sell? That is the question

The Footsie is poised to hit the 7,000 mark but experts are divided on whether it is time to cash in

(AP)

With the Footsie climbing to a 14-year high last month and closing within touching distance of the figure last night, City speculation is rising that the popular stock market index could finally be about to climb above the psychological 7,000 figure.

That could be evidence that the bubbling market rally really will be sustained. But it could also prove to be the tipping point which prompts further sell-offs from investors.

While some experts suggest 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 says. “There is little evidence yet that this will happen, apart from a slight pick-up in M&A.

“If we are to finally break the 7,000 barrier, earnings need to come through, and the big companies need to lead the way. Any disappointing earnings will be punished.”

He believes the Footsie will remain a little short of 7,000 for a while longer. “But I do think we will break 7,000 – and stay there – eventually. It’s not exactly a raging bull market, but it’s going in the right direction.”

Other experts are more bullish. “The current bull market will continue and I am optimistic that the FTSE 100 will breach 7,000 before the end of this year,” says Stephen Bailey, co-manager of Liontrust Macro Equity Income Fund.

“Equity valuations are generally still attractive, as shown by the yield on the FTSE All-Share index topping 3.3 per cent. In contrast, savers in cash accounts are receiving a negative return once inflation is taken into account.”

However, he warned that some parts of the UK market may be held back by, or suffer from, bouts of political risk ahead of next year’s general election.

Julian Chillingworth of Rathbones is equally positive above prospects. “The FTSE 100 will break through the 7,000 barrier. 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 says.

“But as the economy improves, the missing jigsaw piece is earnings growth. Recent data suggest this is about to improve in the US. If this relationship holds in the UK, we should start to see meaningful earnings upgrades and the market push through.”

Richard Buxton of Old Mutual believes it may take a little 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 surprise and earnings upgrades,” he says. “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 stock markets when they crashed during the 2008 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 says.

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

“The steady growth in the UK and the global economy is likely to continue for a few years and there is every reason to expect that to be converted into higher corporate earnings and dividends.”