Why shares are where value lies

Our Chief Economics Commentator on how confidence in economic recovery, and fear of inflation, are behind the FT 100 index's surge to its highest level since May 2008

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The Independent Online

Share prices not a good guide to anything but the latest surge in the FT100 index, bringing it to its highest since May 2008, must be trying to say something.

It could be confidence about the world economic recovery. Since two-thirds of the earnings of companies in the Footsie come from outside the UK, this gives you a way to buy into the world economy rather than the British one. It could be that shares in large companies represent value in a world where money is being depreciated by irresponsible central banks. If the Bank of England is even less successful in curbing inflation than in the past, then shares give some protection.

Investors seem to be switching from bonds into equities and this is part of that trend. As rates rise people lose the capital value of their existing holdings so shares look relatively more attractive.

So there are “good” and “bad” forces that might explain the trend: confidence in the economy on the one hand and fear of inflation on the other. But a word of caution. That previous high at 6,376 on 19 May 2008 was just before the biggest global recession since the Second World War. And we are still a long way from the all-time high of 6,930 on 30 December 1999.