FTSE 100 storms to highest since June 2001

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The FTSE 100 finished at its highest level for nearly five years yesterday as equities continued with their best bull run since the 1980s.

The index of London's leading shares rose 39.1 points to 5,897.8 - its best close since June 2001. It has climbed nearly 80 per cent since hitting a low of 3,287 on 12 March 2003, days before the start of the Iraq war.

The FTSE 250, up 73.7 points to 9,546.0 yesterday, has been a much more impressive performer during the three years since the March low. It has gained more than 150 per cent.

Meanwhile, the broader FTSE All Share rose 20.3 to 3,009.3, and stands 87 per cent above its pre-Iraq conflict level.

The driving force behind these gains has been the strength of corporate earnings. Despite the strong performance by the market, shares are only slightly more expensive relative to earnings than they were at the start of the rally. According to Darren Winder, an equity strategist at UBS, in March 2003 the FTSE 100 traded at 11.4 times forward earnings. Today it trades at just 12.5 times. He argues that this fundamental value in equities has been behind the recent slew of mergers and acquisitions that has set stocks alight.

Last year foreign firms spent £50bnbuying UK companies. This figure excludes the recent takeovers of Pilkington, P&O and BOC.

The low and predictable interest-rate environment has also aided the high number of mergers and acquisitions, Mr Winder said. This is particularly the case when one looks at private-equity takeovers in which buyers borrow the bulk of the cash for the purchase.

Mr Winder can see little on the horizon that will stop the stock market's march higher. He believes the blue-chip index could hit 6,300 in 12 months. But even if the FTSE 100 reaches this level it will still be some way off the 6,930 all-time high it hit on 30 December 1999.

The large number of mining and oil companies in the blue-chip index has been particularly helpful to its performance. These firms have delivered record profits as a result of buoyant demand for commodities from China.

Although both sectors have enjoyed soaring share prices, such has been their ability to generate profits that today they trade on a lower multiple of their earnings than in March 2003.