The FTSE keeps rising – can it last?
Investors face mixed signals amid fears that shares are about to fall. James Connington looks for answers in the data
Fears of a stock market correction are reaching fever pitch as valuations reach successive new highs. American markets – which influence investors everywhere – have not been this expensive since the 1929 Wall Street Crash and the bursting of the “tech bubble” in 2000.
Professional investors are hoarding cash in their portfolios in anticipation of a fall. But is this trepidation justified? Telegraph Money has pulled together some key charts and metrics to explore what is likely to come next for Isa and pension investors.
The UK market does not exist in isolation from the US, which accounts for half of the world’s markets by size, and which sets the tone. If it crashed, the UK would almost certainly follow.
Many British firms – particularly those in the FTSE 100 – also derive a high proportion of their earnings from overseas, so are not solely dependent on the domestic economy.
According to investment firm Star Capital, the UK market currently sits at a price-to-earnings ratio of 23, significantly above the long-term average of 15. However, when the market’s “Cape” score or future earnings are looked at, the picture changes.
Cape is another version of the price-to-earnings metric, but compares the average earnings over the past 10 years to today’s share price, with inflation accounted for. This is intended to smooth out the ups and downs of the business cycle. The UK’s score of 16 is around the level it has been for the past seven years, and is below its 20-year average.
Additionally, FTSE 100 earnings are expected to soar. They collapsed to £84bn in 2015 and £96bn in 2016, after the fall in the price of commodities hurt oil and mining firms, which make up a large part of the index. This year, they are expected to hit £191bn, and in 2018 that figure is expected to rise again to £213bn, according to data provided by fund shop AJ Bell.
Unless the market rises rapidly in tandem, or the estimates prove