Those Intoxicating Highs of Yesteryear Have Never Looked So Tantalising, says Brian Tora
Back on the last business day of the last millennium, the FTSE 100 Share Index climbed tantalisingly close to the magic 7000 hurdle. Not that I feel one should become too concerned over whether what is, after all, an artificial barrier is breached. But there is something about a nice round number like 7000 that represents a challenge. We seem to be made that way.
And then there was Japan. Who can forget the rush upwards in the Japanese stock market that brought the Nikkei Dow index to within a whisker of 40,000 at the end of the 1980s? It never got there, of course, and even after producing one of the best performances of a major equity market last year, it still languishes at less than 15,000 today. It was only half that figure not so very long ago.
Here We Go Again
The rationale behind revisiting those magic numbers from yesteryear is that we are nearly there again. (Indeed, we may have sailed through by the time you read this.) The end of May was not the only time the Footsie had flirted with 7,000. On two or three occasions the Index had approached to within 2% of that all-time high. And 2% was not a great deal anyway. While market rises of this magnitude are not that common, they are not unknown either.
But, to put our benchmark FTSE 100 large-cap index into context, the FTSE 250 Share Index surpassed its old millennium peak some time ago. Even the All Share Index has seen new high ground since the 1990s – and remember, it is the 100 Share Index that carries the greatest weight in this particular measure.
Meanwhile, of course, dear old America trashed its previous highs long ago, with the S&P 500 reaching a new peak very recently.
In theory, new highs should be readily attainable now. Inflation drives up the nominal value of financial assets, and economic growth and greater efficiencies also enhance company profitability. And the problem lies in the valuation criteria that we apply to shares.
P/E Multiples in the Stratosphere
Back at the end of the 1980s, the economic miracle that was Japan had seen a massive expansion in the country’s GDP and a breakneck rise in the stock market as investors took the view that both would continue indefinitely.
At the peak, it was not unusual to see Japanese shares trading on a price/earnings multiple of a hundred times. But when deflation set in and the economy stalled, shares had nowhere to go but down. So did property in Japan. The 1990s and the noughties were a painful period for investors over there. So it was little wonder that the recovery which started at the end of 2012 was treated with suspicion by many.
Nor was the Japanese experience unique. At the end of the last millennium, the so-called TMT boom (Technology, Media and Telecoms) saw valuation levels rocket for those companies that were considered to be in the vanguard of the revolution. Crazy prices were being paid for businesses that had not even turned in a profit, and the end of 1999 and 2000 saw more changes in the composition of the FTSE 100 Index than ever before.
It all ended in tears, of course. And so many of those transformational companies that became part of Britain’s corporate elite by joining the Footsie were consigned to the also-rans. The principle was OK in some measure. After all, many of the largest global companies are technology giants. But valuations became overblown again, and the inevitable correction saw stock market values halve – helped by a war in the Middle East too.
More Hopeful This Time?
This time, however, valuations do not look overstretched. So perhaps there is some reason to believe that more new high ground can be achieved. The problem for the FTSE 100, though, is its composition.
Once, banks ruled the roost – and we know what happened to them! And now it is resource stocks that dominate. With the outlook for the global economy uncertain, these remain out of favour. But we can always hope.
Brian Tora is an associate with investment managers, JM Finn & Co