What do FTSE all-time highs mean for investors?

Jamie Clark, Stephen Bailey

With the FTSE100 notching up 16 all-time closing highs so far in 2017, and currently sitting only seven points shy of last week’s record level of 7,522, we invited Macro-Thematic fund managers Jamie Clark and Stephen Bailey to assess whether this has any implications for investors in UK equities.

Jamie Clark

Jamie Clark, fund manager, Macro-Thematic team:

“While we recognise that new market highs are exciting and worthy of discussion, in and of itself, the FTSE100 reaching a series of new record levels this year tells us very little. To make simplistic comparisons between today’s investment backdrop and that which prevailed when previous highs were recorded would be to fundamentally misunderstand the construction and constituency of the index. 

The index represents a nominal, market cap-weighted expression of large-cap share price performance. Since December 1999 – when the index reached a high which stood for 15 years – we have experienced average inflation of 2.8% a year (source: Bank of England), yet the index sits only 7% higher in nominal terms. So in real terms we are still someway short of highs.

Furthermore, as an average of its members, the FTSE100 level tells us nothing about its constitution. The make-up of the top 100 companies in the FTSE100 index changes every quarter and evolves significantly over the years. The index level does not give a picture of the dispersion of underlying share prices and valuations. While FTSE/Russell figures show a (backward looking) FTSE100 price/earnings (p/e) ratio – a valuation measure which compares a company’s share price against profits per share – of 26x, this ranges from 13x for its utilities members to 53x for the oil & gas stocks. 

Some companies within the FTSE100 are expensive and prone to derating while others provide reasonable value with good earnings growth prospects. To distil these disparate options to one index average loses a lot of information in the process. We do not feel the index is particularly vulnerable to a correction currently, and our positive outlook is based upon the forward-looking fundamental outlook for companies.”

Stephen Bailey

Stephen Bailey, fund manager, Macro-Thematic team:

“Indeed, UK equities look good value to us – whether we are comparing them against international equities or other assets classes. The bond market has experienced a multidecade bull market, but now bond investors can expect to receive a negative real return of -2.0% over the next 10 years: the difference between a 1.0% nominal yield and (current) expectations of 3.0% average annual inflation. By contrast, shares are real assets (whose prices can rise with inflation rather than being fixed like a bond redemption price) and the FTSE100 currently offers a forward looking earnings yield of 6.6%. This earnings stream is also growing at the same time as prices are rising, meaning that on a p/e basis the FTSE100 is not necessarily getting more expensive even though the index is at an all-time high.

As Jamie noted however, the FTSE100 level tells us nothing about the dispersion of valuations and prospects of its constituent companies. The best way to access the value in the UK market is to select the best opportunities and shun the worst, rather than buying a blended average of the good, the bad and the ugly – which is what the FTSE100 index level represents. Some constituents, such as the majority of the FTSE100’s utilities and its consumer staples stocks, are expensive by historic standards and offer very low-growth, and these ‘bond-proxy’ characteristics mean that they may be caught up in the sell-off which is now hitting bonds. Utilities carry the additional risk of political interference ranging from introduction of an energy price cap to industry renationalisation

Other areas of the FTSE100 offer better value and prospects which are underpinned by macrothematic tailwinds; the FTSE100’s life insurers for example are well placed to benefit from longterm demographic changes which will mean more demand for savings and pensions products.”

Disclaimer:

• Past performance is not a guide to future performance. • Do remember that the value of an investment and the income from it can fall as well as rise and you may not get back the amount originally invested.  Investment in Funds managed by the Macro-Thematic Team involves foreign currencies and may be subject to fluctuations in value due to movements in exchange rates. • The Funds' expenses are charged to capital. This has the effect of increasing dividends while constraining capital appreciation. • The performance of the Liontrust GF Macro Equity Income Fund may differ from the performance of the GF Macro Equity Income Fund and will be lower than its corresponding Master Fund due to additional fees and expenses.

• The information and opinions provided should not be construed as advice for investment in any product or security mentioned.  • Always research your own investments and consult with a regulated investment adviser before investing.

Wednesday, May 24, 2017, 5:28 PM