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Tuesday, May 21, 2013

Britain is booming? FTSE reaches 12-year high as record looms

Index rises to levels last seen before dotcom bubble burst, fuelled by a relatively calm eurozone, QE, low interest rates and rising confidence in Japan

Shares in London have reached levels last seen at the height of the dotcom boom nearly 13 years ago.

At a close of 6,755 points, the FTSE 100 blue chip index matched levels from September 2000, just before the market's fascination with loss-making technology companies such as came to an abrupt end and the dotcom bubble burst. The closely watched index of the 100 biggest companies traded in London is also within sight of its all time peak of the 6,930 reached on 30 December 1999.

The FTSE 100 is nonetheless lagging behind many other global markets, including the S&P 500 in the US and the Dax in Germany, which are at record levels.

Investors are betting that central bankers, including the Bank of England and US Federal Reserve, will continue their attempts to boost the global economy by printing money and keeping interest rates at historic lows. The buoyant stock market may take some of the pressure off George Osborne as he tries to persuade voters that his emphasis on public spending cuts to re-establish confidence in the economy is working. Bailed-out RBS was also the biggest gainer on Monday, rising 4.5%.

Earlier this month, the chancellor narrowly avoided the humiliation of a triple dip recession and since then has enjoyed the first signs that economic activity is picking up, mainly in the services sector and the south-east.

Even so, the FTSE 100 – which only four years ago sank to below 4,000 – is linked to the the global economy, which accounts for around 70% of sales by FTSE 100 firms.

Investors were encouraged by the Japanese government's optimism, amid signs that Tokyo has inspired the first sustained period of solid expansion in two decades. Signs of growth, albeit tentative, have encouraged a more positive mood among investors, while the long-running eurozone crisis seems to have entered a period of reasonable calm. A number of major deals, the latest being Yahoo's $1.1bn (£750m) proposed purchase of blogging site Tumblr, have also helped sustain the rally.

The historically low level of interest rates has also made shares more attractive than other investments. Gold and silver, previously considered safe haven investments, have lost their lustre.

Since the global banking crisis sent markets tumbling, with the FTSE 100 falling to 3,529 in March 2009, shares have slowly been regaining lost ground, gathering momentum in recent weeks. The turning point came last summer when the head of the European Central Bank said he would do "whatever it takes" to save the euro from collapse. Mario Draghi's message was taken by investors as a vote of confidence in the 17-member currency club and a signal that a repeat of the Greek crisis would be dealt with swiftly by Brussels.

Richard Hunter at the UK's largest financial adviser, Hargreaves Lansdown, said shares in Britain's 100 biggest companieswere likely to continue rising this year as long as companies could sustain their current run of profits.

"It doesn't look like central banks are going to stop printing money any time soon. Interest rates are going to remain low. When there is little money to be made investing in government bonds and commodities are volatile, stock markets have become the focus of most investors' attention," he said.

But some City analysts believe the recent positive run could soon come to an end, especially if the central banks turn off the money taps.

Julian Jessop at researchers Capital Economics said: "[We] expect a substantial correction in equity prices in the second half of the year, perhaps of the order of 10% for the US and UK markets and 15% for Europe and Japan, most likely triggered by the scaling back of the Fed's quantitative easing programme and a renewed escalation of the crisis in the eurozone. Assuming global monetary policy remains loose and Europe emerges stronger, the markets should then perk up again in 2014. But we doubt the current euphoria will last throughout 2013." © 2013 Guardian News and Media Limited or its affiliated companies. All rights reserved. | Use of this content is subject to our Terms & Conditions | More Feeds