The FTSE keeps ris­ing – can it last?

The Daily Telegraph - Your Money - - FRONT PAGE -

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

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