FTSE 100 at all-time high! Great news?

05 October 2016 | Neil Cowell


 Remove  Save

As I write, the FTSE 100 Index has just broken through the psychologically important 7,000 level to close at an all-time high. Great news, yes? Well …

One reason the FTSE 100 has done well lately is that sterling has been very weak, which boosts the overseas earnings of the United Kingdom's large multinational companies. Two things to bear in mind about that currency weakness:

  1. It's a result of Brexit, which is still casting a great deal of uncertainty over the UK economy;
  2. Sterling weakness has also enhanced returns from overseas markets – one good incentive for globally diversifying your investments.

And another thing: beware of talk of "psychologically important" levels in stock markets. Seven thousand is no more important than any other number, and people who say it is are suffering from a well-known behavioural bias called anchoring. The market is not automatically better valued at 7,000 than it was at 6,500.

The value of the market depends on a wide range of factors, including the outlook for company earnings. As I already mentioned, overseas earnings are currently being boosted by a weak pound. But will that continue? And what about domestic earnings against a backdrop of economic uncertainty?

People who say they know the answers to these questions may be suffering from another behavioural bias: over-confidence.

The truth is that I don't know what the outlook for sterling is, and I don't know what domestic or overseas earnings are going to look like in six or twelve months. And I certainly don't know what investor sentiment – the other great driver of stock market valuations – will be doing as we navigate Brexit and beyond.

So, is it great news that the FTSE 100 is above 7,000? Maybe, and maybe not. And considering that uncertainty, I'd rather stick with a globally diversified portfolio of equities and bonds.

Important information:

This information is directed at professional investors and should not be distributed to, or relied upon by retail investors.

This information is designed for use by, and is directed only at persons resident in the UK.

The value of investments, and the income from them, may fall or rise and investors may get back less than they invested.

The material contained in this document is not to be regarded as an offer to buy or sell or the solicitation of any offer to buy or sell securities in any jurisdiction where such an offer or solicitation is against the law, or to anyone to whom it is unlawful to make such an offer or solicitation, or if the person making the offer or solicitation is not qualified to do so.

The information in this document is general in nature and does not constitute legal, tax, or investment advice. Potential investors are urged to consult their professional advisers on the implications of making an investment in, holding or disposing of [units/shares] of, and the receipt of distribution from any investment.

The opinions expressed in this article are those of the individual author and may not be representative of Vanguard Asset Management, Limited.

Issued by Vanguard Asset Management, Limited which is authorised and regulated in the UK by the Financial Conduct Authority.



 Remove  Save