The FTSE 100 hit three record highs in the past week, so have savers started to love UK shares once more?
A FTSE 100 record high is still a curious phenomenon for those who spent 15 long years waiting for the London stock market to match its dot com peak.
After notching up a close of 6,930.2 as investors downed tools to celebrate the millennium on 31 December 1999, the Footsie then failed to beat that high watermark until February 2015.
It nearly made it but fell short numerous times, and a stock market high became a rare beast in the UK.
Now FTSE 100 records are like buses – we’ve had three in the past week alone.
On its way to the those recent fresh highs, the index of the London Stock Exchange’s 100 largest companies climbed an astonishing 988 points in two months.
That was a heady 14 per cent rise from the 6,889 it fell to in late March to the 7,877 it hit on Tuesday (before yesterday’s 89 point fall saw it slip back).
So what has happened? Is the British economy looking brighter, Brexit considered less of an issue, or has the world woken up to the great opportunity Britain’s biggest companies represent?
Not really. There’s certainly an element where the UK stock market’s previously unloved status has drawn in some contrarian investors, but the main driving force has been the pound taking a tumble.
Map a chart showing the pound vs the US dollar against the FTSE 100 and you can see the relationship: as the pound falls, the Footsie rises.
A big chunk of the FTSE 100 is made up of large international companies that do lots of business overseas, when sterling falls their profits from abroad translate back into more pounds.
Their results thus look better and share prices can rise without price-to-earnings valuations being stretched any further.
The chart above shows how as the pound has fallen the FTSE has risen since the end of March
The main factor behind the stock market’s stonking recent run has been the about turn on expectations that the Bank of England would raise interest rates in May.
That rate rise went from being forecast as a dead cert to dead in the water.
Contrast this with the expectation that the US might raise rates by a bit more than previously expected and you have a recipe for the pound falling.
‘Yes, yes, we get it.’ I sense some readers thinking at this point. After all, this pound down, FTSE up trade is a known thing and has been easily observable since after the Brexit vote.
But it also raises an interesting question, because the UK stock market as a whole – including the broader FTSE All-Share and AIM – has been deeply unloved by investors for some time.
Statistics show personal investors pulling money out of UK equity funds, and big institutional and international investors aren’t too keen either, bar the occasional overseas company shopping in the sales for bargain UK PLC takeovers.
So should you take the contrarian stance and buy the UK? And can you even claim doing so is a contrarian move if the stock market is hitting record highs?
The answer to the latter is probably ‘yes’, because there’s a lot more to the UK stock market than the FTSE 100 big guns – and there a lot of companies out there still beaten down and unloved.
The FTSE 100 may be at a record high – and you would certainly have been better off buying two months ago before it rose 14 per cent – but the UK stock market is not particularly expensive.
The CAPE ratio (cyclically adjusted price to earnings) is a long-term measure of valuation based on the work of US professor Robert Shiller. Some value investors suggest that buying a market when it is either cheaper than its long-term median level, or fairly priced, can indicate decent future long-term returns
Latest data from Star Capital shows the UK stockmarket’s CAPE ratio at 16.3 at the end of April – this is broadly in line its long-term average and makes it reasonably priced, rather than expensive.
The price-to-book measure, which deals with share prices vs the value of companies’ assets, is 1.8 for the UK. That is below the developed market average of 2.2, the world average of 2.1 and the developed Europe average of 1.9.
That might reflect the extra dose of uncertainty that the UK represents, with a known leap into the unknown from Brexit and a potential one from a Jeremy Corbyn-led government – or it might represent an opportunity.
The answer to whether to buy is one investors need to work out for themselves, but if they do they may need to be considerably more discerning than those indulging in the pound vs FTSE trade.
For all the worries over Britain, it is also home to a lot of very good and innovative companies, with robust balance sheets and a particular strength in knowledge and technology.
My view is that the best opportunities here lie with investment trust and fund managers, who have proved themselves over the years, investing in smaller and medium-sized companies with little or no debt.
If you do invest in the UK, it’s time to be picky.