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FTSE hits new highs: Time to sell out?

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25/02/2015
News that the FTSE 100 has hit all-time highs is rightly giving investors pause for thought. It may be 15 years ago, but anyone who saw their savings destroyed by the bursting of the technology bubble is unlikely to want to repeat the experience.

So should the FTSE’s new highs engender caution? Should investors be considering moving out of the stock market altogether?

It is easy to see why investors might be nervous. The last time the stock market reached these levels, it subsequently suffered a near-40% drop, from which it has taken over a decade to recover. There are still a lot of banana-skins for the market to negotiate – higher interest rates in the US, the Eurozone situation, geopolitical tension in Russia and the Ukraine, and the collapse of the commodities markets.

However, there are a number of reasons why 2015 is not the same as 1999: Firstly, it is fifteen years later – analysis by Whitechurch Securities shows that if the current FTSE 100 level is rebased for inflation over that period, it is the equivalent of the FTSE 100 trading at 10,679. In other words, the index is, in real terms, 50% lower than its peak of 15 years ago.

Equally, the FTSE 100 is not exhibiting anything like the over-valuation seen in 1999. One measure of value is the price to earnings ratio of a market. This is an indication of how much investors are being asked to pay for the revenues a company is generating. The ratio for the FTSE 100 is currently 16x. This is meaningfully below the 27x at the market peak in 1999. Whitechurch points out that if the FTSE 100 was trading at 27x earnings today it would be at 11,370.

None of this is the same as suggesting that the market offers great value – shares are certainly not a bargain. That said, it still looks better than the alternatives: Bonds, in general, offer a very low income and are at risk of losing value if interest rates rise. The income on commercial property is being pushed lower as it becomes more popular with investors.

Overall, investors may feel that stock market valuations look a little toppy, and may be uncomfortable investing at these levels, but if they want to generate a high, inflation-adjusted income, equities are still – in reality – the only game in town. As such, while no-one would predict stellar gains for the stock market from here, it is difficult to see a sell-off equivalent to that seen in 1999 either.

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