If the index hits an all-time high, is it evidence of a Tory-led recovery or investors stocking up ahead of a Labour win?
Any day now, the FTSE 100 might hit an all-time high. Then again it might not. The blue-chip share index has been dithering within 200 points of the 7,000 mark for much of last year. Hopes were rising again this week that it would finally surpass the 6,930-point record set in the heady, dotcom days of December 1999. The market has briefly set aside jitters over Greece’s finances and energy giants such as BP have shown they can cope in an era of cheap oil.
We have been waiting a long time. So-called experts entered 2014 proclaiming that the FTSE breaking new ground was a formality. Yet more than a year later, something keeps stopping it from staggering over the line.
It shouldn’t matter what the FTSE read-out is. Equities are just a fraction of the City’s daily trade, which straddles bonds, foreign exchange, derivatives and commodities. The absolute figure the index closes at each night is technically meaningless, other than to reflect the balance of pessimism or optimism that coloured the trading day. One career banker remarked yesterday that the FTSE had never reflected real life in all his years in the City. But it does matter, if only for the sake of broader corporate and economic confidence.
And confidence — in boardrooms and beyond — remains fragile. These do not feel like days of great celebration, with champagne flowing across the City — even coming so soon after the bonus season. They are days of uncertainty, of rising geopolitical risk abroad in the Middle East and Ukraine, scant eurozone growth and a fragmented political landscape at home. The amount business is investing for the future is a key concern. Yet nor do company fundamentals suggest that equities are ridiculously overpriced, as they were in 1999, when the notion of profit was regarded as old-fashioned and all that mattered was that growth prospects looked good.
Interest rates are pinned to the floor and Mario Draghi at the European Central Bank is spraying money around in an attempt to kick-start growth in the eurozone. So desperately are investors searching for somewhere safe to stash their capital that negative yields are stalking the bond market. Investors are effectively paying to hold bonds issued by reliable firms such as food group Nestlé, and there are similar examples among short-dated sovereign debt. No wonder shares are being given the benefit of the doubt.
Should the FTSE pass 7,000 or 6,930 points, stand by. No landmark should be wasted in an election campaign. Surely a FTSE all-time high is evidence of the George Osborne-led economic recovery, of booming business confidence, surging exports and job creation? Or, maybe, as the saying goes, investors buy the rumour and sell the fact, so they are stocking up ahead of Labour sweeping to victory on May 7? Neither is the case. In fact, business leaders I talk to are settling in for a choppy year that will in all likelihood feature two elections.
It is worth remembering that the FTSE 100 is a very different beast now from the club of companies that topped out in 1999. First of all, the constituents have changed. Banks (11 in 1999, five now) have retreated, the product of a financial crisis whose after-effects are still being felt. So have software and computer services firms (from six to one), according to a Thomson Reuters analysis, as the dotcom bubble burst. The ranks of miners (three companies then, seven now) have swelled, explaining the index’s sensitivity to China’s commodities consumption. The biggest growth has come in the area of support services (think of Capita and other contractors, up from three members to 10).
But the biggest change is that the index has become far more international, in part because of London’s global pulling power. Chief executives are routinely recruited from abroad; some blue-chips derive a fraction of their income from Britain these days. As Lord Rose pointed out as he sprang to the defence of Alliance Boots boss Stefano Pessina the other day, only 58 per cent of FTSE bosses are British, and a quarter of chairmen hail from overseas. In fact, many FTSE members have a glancing regard for what happens in Britain — other than the tax they must pay and their frustration at how long it is taking to resolve London’s aviation crisis. For political capital, best to mine the FTSE 250, a more accurate indicator of domestic economic health.
In assessing the prospects for the FTSE 100, it is better to regard it as behind the curve, not ahead. Contrast it with its American equivalent, the S&P 500, which broke through 2,000 points for the first time last summer and has carried on powering upwards. That can be explained by a look at the corporate environment in the United States. Confidence is up, energy prices are down.
Thanks to tumbling gasoline prices, chief executives are rubbing their hands in glee that a new consumer boom is on the way. The presidential campaign is looming, but unlike the unpredictable outcome here, two-party politics still dominate. As the next iteration of Clinton and Bush prepare to do battle, Capitol Hill is gridlocked and very little of President Obama’s new legislation is expected to be passed.
Wall Street is also cheerfully distant from the eurozone. London isn’t. Hopes that Greece’s bailout can be quickly resolved look misplaced. The charm offensive of Greek finance minister Yanis Varoufakis, who will today meet his German counterpart, Wolfgang Schäuble, is wearing thin. While his anti-austerity government is softening its stance on debt forgiveness, the ECB has banned the Greeks from using government debt as collateral for cash — the opposite of giving the country more breathing space..
That all-time high may be just around the corner. But this is no time to pop open the champagne.