FTSE 100 returns to 1989 with strong January performance

FTSE 100 returns to 1989 with strong January performance

The move of the market upwards has formed part of a global rally — in the US, the Dow Jones Industrial Average climbed 6pc over the month, while in Asia Japan’s Nikkei index put on 7.2pc.

In the UK, the FTSE 100 has climbed despite the looming threat of a triple-dip recession: last Friday, figures showed the British economy shrank 0.3pc in the final quarter of 2012, leading to criticism of the Government’s austerity plans.

However, Britain’s benchmark index now has little in common with the domestic economy. Many of its largest constituents, such as the heavyweight miners BHP Billiton, have most of their operations overseas.

“If you want a sense of where the UK economy is going, unfortunately the FTSE 100 is not very helpful anymore,” said stock market historian David Schwartz. By contrast, in 1989, there were many more companies in the index making a meaningful contribution to the British economy.

Because the FTSE 100 is more reflective of investor sentiment towards the international economy, some City experts believe it is developments abroad that have helped spur this year’s stock market rally. The New Year’s Day compromise deal on the US “fiscal cliff”— tax rises and spending cuts that threatened to plunge the world’s biggest economy back into recession — enabled investors to start the year in high spirits. Encouraging economic data from China and the abeyance in Europe’s debt crisis have also partially eased some of the market’s concerns.

Following the tumultuous days of 2011 and the first half of 2012, many traders have been simply relieved that they have made it through intact, according to Steven Fine, managing partner at stockbroker Peel Hunt.

“There has been pent-up relief that, actually, you’ve got to the end of the year and the world hasn’t ended, there is still a financial services industry,” he said.

Tim Steer, a fund manager at Artemis is in agreement, arguing that investors want to feel more bullish after experiencing a tough time in the markets. The FTSE 100 did climb 5.8pc over the course of 2012, managing to rally from the low of 5,260.19 it reached at the start of June, although actual volumes were thin, with many investors staying on the sidelines.

But what brokers are now hoping is that this year’s strong early performance signals the start of a broader move out of bonds into riskier yet better returning equities – the so-called “Great Rotation”. Since the financial crisis, money has flowed into the bond market, which is considered a safe-haven because bonds provide a steady income and are less volatile than shares. Investors now see value in the equity markets and are looking to take on more risk, according to Paul Kavanagh, a partner at Killik & Co. While he does not think the Great Rotation has started, more money is flowing into shares.

“The rationale to have equities in your portfolio is stronger than it was six months ago,” said Mr Fine at Peel Hunt. “Volumes have picked up in January. They’re not necessarily healthy and buoyant but they’re increasing.”

The FTSE 100 has risen over 18 Januaries since it was launched in 1984 and this year’s strong first-month performance augers well for the rest of 2013 if 1989 is anything to go by. That year, the FTSE 100 went on to finish 35pc higher than where it started, while in 1998, when the blue-chips gained 6.3pc, it went on to record an annual gain of 14.5pc.

The index will experience a correction, according to analysts, who expect the market to pull back sharply at some stage. The reaction to that, it is believed, will be vital for understanding the true nature of this year’s rally. Investors will either “run for cover” or view the correction as a buying opportunity, said Mr Kavanagh.

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