ftse at 7000 would bring closure

The FTSE 100 climbed to a five-year high breaching 6,500 points this week; the problem is this is just as worrisome for some investors as were the lows of 2009.

ftse at 7000 would bring closure

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Equity markets we are told are driven by fear and greed, but it is the former that arguably still dominates today with vast amounts of capital still sitting in cash despite four years of record low interest rates at 0.5%.

Just ask Jim Wood-Smith, chief investment strategist at Investec Wealth, who, having spent most of this year travelling the country and talking to the IFA and wealth manager community, reports that few had said they were putting money into the market, bullish or not.

“The evidence we have is that despite equity markets doing so well, there still appears to be an awful lot of fear around,” he says.

“That fear has moved from ‘the world is so risky and dangerous that I can’t possibly buy into equities’, into being ‘equities have done so well that something has to go wrong at some stage and so surely the right thing to do is wait for a pullback’.”

No sharp correction

However, in common with others, Wood-Smith asserts that the very fact there are so many potential buyers on the sidelines means any correction is unlikely to be as sharp or as prolonged as people might think. 

So if there is indeed a pullback, when is it likely to happen? With the markets seemingly robust to the Italian elections and other macro hurdles, a guess might be a mere two months away – “Sell in May and go away, come back on St Leger Day” goes the tenet.

Still, who’s to say that more records won’t be broken? Another theory put forward by Wood-Smith is one of an equity market “melt-up” with the FTSE breaking the 7,000 barrier signalling closure on the dotcom era of 13 years ago.

“The UK market in particular has had this open wound that goes back to the end of 1999 because it has never regained its dot com era level – an intraday peak of 6,950 on 30 December 1999,” he explains.

Positive coverage

“Once the FTSE 100 does get to 7,000 it is going to get an awful lot of positive coverage then about what a fantastic investment equity has been recently and there is a chance that could then trigger off further new money to come back into the market; although from our angle that would be seen as a good opportunity to start selling back our equity weighting.”

Of course, if you do want to invest in the near future then you need to be alert to the best opportunities where valuations aren’t looking so stretched, and that’s a topic I’ll be covering in the next issue of Portfolio Adviser.

The emphasis must be on not being paralysed by fear and taking a stance – whether you are a bull or a bear. After all, cash rates don’t look like they will be changing any time soon.
 

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