Why the FTSE is back in fashion and can continue to dominate: HAMISH MCRAE

You don’t get bull runs like this very often, and you don’t want to miss them when they come. Last week the FTSE 100 share index hit 10,687 and is now 8 per cent up on the year to date, and nearly a quarter higher than it was a year ago.

This is its strongest boom this century, and a fine reward for savers who have hung on through some pretty scary times.

By my quick tally there must now be something like 20,000 Isa millionaires in the land, up from just over 5,000 on the most recent official count back in April 2023.

Anyone who listened to the gloom-mongers and sold last year has a right to feel a little sore.

So what’s next? A share boom like this will for many seem rather odd, given the troubled outlook for the UK economy.

But the Footsie is not about what happens in Britain, nor about the views of domestic investors. On average three-quarters of the revenues of the index’s members come from abroad, and nearly two-thirds of the shares are owned by overseas investors.

You have to hunt for precedents – periods when the UK markets have performed like this. You have to look at the relative value of equities now on a global and historical basis. And you have to at least be aware of the investment fashions of the moment.

First, the precedent. The best one I can suggest was the dot-com boom of the late 1990s, plus the bust in 2000 – but with two crucial differences.

The most important similarity is the sense of euphoria driven by the awareness that the internet revolution would transform the world economy, just as artificial intelligence – AI – is about to do now. 

This was supported by what seemed a reasonably solid outlook for global growth. Inflation had been brought under control after the dreadful experience of the 1970s and 1980s, so there were few fears of a surge in interest rates and there was ample liquidity in savings institutions.

Then investors allowed themselves to get carried away, and everything went pear-shaped.

The Footsie fell from 6,950 on December 30, 1999, to 3,570 by the end of 2003 and only regained its peak 16 years later. Not an encouraging outlook, but happily there are two crucial differences.

One is that UK companies are not players in this high-tech boom. That’s an American game.

What’s happening now, with the wobble in the price of AI-related stocks, is the rotation from AI to firms in ‘boring’ sectors, such as banking, resources, pharmaceuticals, defence and consumer products, which dominate the Footsie.

It is quite possible the AI boom will indeed mirror the dot-com boom in that it will transform the world economy, but many of the companies that are driving it won’t make sufficient profits to justify their current ratings.

A bear market in the shares of the ‘Magnificent Seven’ could last for 18 months, maybe longer. The shares of one of those top seven technology stocks, Microsoft, are already down a quarter from their peak. But until the next global recession comes along, most of the Footsie enterprises will continue to benefit from this growth phase of the economic cycle. Being boring is best.

The other difference is that the structural disadvantage facing the London market no longer applies. For a quarter-century after Labour took power in 1997, thanks to the changes in tax and regulations it brought in, UK institutions have been net sellers of British companies. 

In the 1990s they owned half the market. Now it is some 4 per cent. Whether or not plans to reverse that actually work doesn’t matter. They don’t have enough shares left to sell. That transforms the outlook.

Valuations? They still look just about OK. The Footsie price/earnings ratio has risen to 21. Its long-term average is 16, so it is asking quite a bit to justify that. 

But it is below that of the S&P500 at 29, and foreign enterprises are still snapping up UK quoted firms as they look good value.

That leads to the final point. The fashion now is for value, not airy-fairy hopes. I expect this to dominate investment for a long while yet. 

Somewhere in the future there is the next bear market, but wise investors should not miss the final months of this one.