Having closed at 7,022.51 on 20 March, to some it would appear that the FTSE 100 has peaked for the near term, especially once you have considered that there was a 16-year gap between this and the last record, set back in 1999.
According to Webster-Smith however, there is plenty more upside to come.
“In 2014, counting dividends there was only just a positive return from UK markets, whereas American funds topped 20% [including currency movement],” he explained. “So, from a relative valuation point there is potential upside in the UK market because there is a recovering economy, and if interest rates are going up because we are growing, that is a positive sign for equities.
“I do not think there will be a capitulation in the US, but I do not see it driving the market forward. Drivers are more likely to come from where you would not expect it, which is potentially the UK market. We have not had a big rally yet, and if we see an improvement in earnings alongside a clear-sighted government, there could be potential in the UK market.”
Webster-Smith cited the mining sector as a possible driver of this rise.
“It has been 16 years since [the 1999 high] and it is a very different market now to what it was,” he said. “Back then tech-driven companies were at the top, and a lot of them do not exist anymore. What was driving the FTSE then was very different to now.
“Mining has bottomed-out, and when the sector drives upwards it will push the FTSE up significantly. The FTSE has already gone up to 7000 without it. All the components of the mining industry, such as the oil price coming back up, are doing what they need to do. There is potential for productivity growth in China – where there has been action to preserve long-term growth – and huge demand for resources. Yes, it has lagged recently, but that is why there is room for mining to pick up.
“The time to buy into the mining sector is not in three years’ time when it has recovered. If you look at the mining companies into an index they have done about as badly as Europe, without the rally of course. So from a relative valuation point that is where we are looking for opportunities.”
Webster-Smith is already considering upping his weighting to the sector as soon as next month.
“We have a small equity allocation to mining – 2% [of the 29% medium-risk UK equity weighting] in US dollars, which we took on last year,” he said.
“One of the things we need to look at is when – or if – we should increase that weighting. The mining sector has been flat since we bought it, so the question is actually ‘do we remove that US dollar share and buy GDP-hedged and then wait for the mining companies to go up?”
“We will add to it in April if we see momentum start to build up in BG [Group], BP, Rio Tinto and Glencore [Xstrata] and start seeing demand in China.”
