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Charles Hepworth, GAM

Is it time to party like it’s 1999?


Charles Hepworth (pictured), Investment Director, GAM, comments on the outlook for the FTSE 100 index…

The recent rally in the FTSE 100 index from the low in October last year has been impressive given the preponderance of oil-related companies within this index. 

Given that on Tuesday 24 January the FTSE 100 surpassed the record high reached over 15 years ago at the end of 1999, many investors will be calling an intermediate top to the market. In our view this a naïve view of the world, especially when you include income distributed from the companies within the FTSE 100, combined with the fact that the index surpassed its previous peak in January 2006 and again in late 2009 following the financial crisis. Did either of those occasions see naysayers calling the end of the FTSE? No.

Investors often get psychologically attached to a market level, which is understandable from a behavioural perspective, but completely illogical from a valuation perspective. The UK market is now better valued on price-to-book and price-to-earnings ratios than arguably it was in 1999, and even again in 2007. This justifies its current level from a fundamental analysis viewpoint. On a technical perspective I am optimistic that the market can make further gains from here with the FTSE 100 trading towards an upper range of 7500, and this level possibly being met sometime during 2014. In the short term, the general election will hang on the UK market and it is likely this will prevent any serious movements from today’s level.

For this reason we have moved to a medium-term underweight exposure to UK equities in our risk-rated model portfolios. Remember, many global indices already hit their previous peaks a few months ago – the FTSE 100 is only playing catch-up to the rest of the pack that has already moved ahead.

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