Can the gains in the FTSE 100 be sustained?

  • Added:
    May 16, 2013
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It’s been a quite remarkable start to 2013 as the FTSE 100 boasts its best January performance for 2 decades. During January it rose 379 points or 6.43%, its best start to the year since 1989.

Almost £100bn has been added to the value of FTSE 100 in January alone, which is raising fears that the index may have grown too quickly and that the appetite amongst investors for equities may soon come to a shuddering halt.

The rally in the markets has also been felt in other global stock markets, with Tokyo's Nikkei index rising 7.2% and the US Dow up 6% in the same period. What many find surprising is that climb in the UK in the FTSE 100 comes at a time when official figures show the UK economy contracted 0.3% in the last quarter.

Not only has the value of FTSE 100 shown growth in the first month of 2013, more interestingly perhaps, is that the most recent climb comes after a steady rise in the index thought 2012, with any annual rise of 5.8%, indicating a longer term trend.

Ironically it was the banks that saw some of the biggest increases in their share prices in 2012. Lloyds banking shares rose 85% in the year eclipsing all other FTSE 100 constituents. Royal Bank of Scotland too saw the value of its shares soar by 60% over 12 months, the fourth best performing company in terms of share price performance.

So what are the factors driving the FTSE up? The first place to look is across the Atlantic, investors finally have some encouraging data on jobs, and more confidence in the manufacturing sector. This data has been behind the Dow Jones Industrial Average, breaking through 14,000 for the first time since the end of 2007.

In addition in recent months, equities have become an increasingly attractive investment option for investors as they look for returns during a period of historic low interest rates. There is cautious optimism about economic prospects and some record levels of company profits. Fears are beginning to subside about the Eurozone crisis which means that investors are more willing to invest again in shares in companies. However, this recent return to equities has come at the expense of investment into currencies and bonds.

Is the performance of the FTSE 100 really that important? Well actually yes, certainly the performance of those major companies that make up the FTSE 100 is very important, not just here in the UK, but internationally. The total combined value of the 100 companies represents 7.8% of the world’s equity market capitalisation, and 85% of the UK’s equity capitalisation.

Whilst the rise of the FTSE 100 currently appears to be bulletproof, with the UK on the precipice of a triple-dip recession, history tells us that inevitably rallies do always come to an end. The question no one knows is when.

Author's Profile

John Holland was the former head of the UK regional operation at the London Stock Exchange, with responsibility for both AIM and The Main Market. He has been advising companies since 1995 about stock market flotation and is a regular author of company finance and stock market publications and articles in business and financial press as well as various institutions on the internet.

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