FTSE 100 parties like it's 1999

The FTSE 100 index has finally surpassed the peak of the dot com boom, but what does that actually mean?

by Adam Gale
Last Updated: 25 Feb 2015

The FTSE 100 index of shares reached a record level of 6,958.9 during trading yesterday, finally exceeding the previous peak of 6,950.6 that it reached way back on December 30 1999. Possibly heavy-headed after champagne celebrations last night, stock brokers have seen it dip slightly this morning to a somewhat less dramatic 6,924.1.

The late 90s dot com bubble was inflated by feverish investment in internet firms, driven by blind faith in the power of technology. It burst in 2000, when more sober investors started to realise that a lot of these firms didn't actually make much money. Yesterday's peak has inevitably drawn comparisons.

The good news is that 2015 is not 1999. The differences in the markets are profound. The FTSE 100's price to earnings ratio is now 16, compared to 27 in 1999, meaning investments are more firmly rooted in returns rather than speculation.

Are equities back then?

For years, equities have been out in the cold. While the FTSE 100 has only just reached its peak from 15 years ago, other investments have surged ahead. According to FT data, although the value of the FTSE 100 is 66% up on its 1999 peakonce inflation and dividend payments have both been taken into account, the FTSE all-actuaries index of gilts (a British bond index for those who don't speak trader) has outperformed it by 70% over the same time.

Gold, meanwhile, has tripled in value, while the average house is four times more expensive. The only worse place to have put your money over the last 15 years appears to have been under your bed.

Given the relative strength of non-equity investments over recent years, there is a case that the FTSE is in fact undervalued, despite its current heights. The property boom has decidedly slowed and bond yields are at rock bottom, after all - surely shares underpinned by strong earnings are a natural investment.

This, however, fails to take into account the artificial inflation of equity prices due to quantitative easing (QE) and low interest rates. These disincentivise investors from putting money into banks or bonds, encouraging them to invest in assets like stocks and property.

When global QE eventually ends and interest rates rise, there will be a pressure for equities to fall. Even more significantly in the long term, the ageing population could also put a brake on stocks.

According to the latest Barclays' latest Equities-Gilts Study, the rapid rise in the proportion of over 65s among the population will mean more people spending their pensions and fewer people saving for them. This in turn will lead to higher interest rates and lower demand for shares. 'A key secular driver of world asset prices has peaked and will be fading strongly in the years to come,' Barclays said.

There's no cause to panic now, as there was in the year 2000, but there's also no reason to expect another boom. Given what happened last time, that's probably a good thing.

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