THE best measure of the health of the UK stock market is the FTSE 100, sometimes just known as the ‘footsie’, writes Anthony Platts.   

It is the share index of the 100 companies listed on the London Stock Exchange with the highest market capitalisation.

It is one of the most widely used stock indices and is seen as a gauge of business prosperity for business regulated by UK company law. Although symbolic, investment managers tend to focus more on the FTSE All Share Index – as this aggregates not only the FTSE 100 but also the FTSE 250 (the next largest 250 companies) and the FTSE Small-Cap (index of smaller listed companies).
Another importance of the FTSE 100 is the forward-looking nature of it as a share price index. Company share valuations are the present value of an investment in a company based on future dividend payments as a share of the profits.

At the moment, confidence in corporate profitability is high and hence the FTSE 100 at highs last seen in October 2007. The caveat is of course that October 2007 was the previous peak in the market before the housing bubble of the previous decade exploded so disastrously.

Markets are often fastest on the way down than on the way up. The last example of this was the October 2007 peak to the March 2009 low took almost 17 months to endure. The rally back up to the same levels has taken 50 months of hard grind.

So measurements of the health of the private sector from the state of the stock market, to the buoyant employment increases, paint a rosy picture of the state of the UK economy. Then you have the state of the public sector to throw into the mix to give an overall picture of UK plc.

As we know, the ONS preliminary estimate for UK GDP for the first three months of 2013 came in at 0.3%. Figures released last week from the left-leaning think tank NIESR (National Institute of Economic & Social Research) estimates that UK GDP for the three months to April of 2013 rose by 0.8%. On an annualised basis this would indicate 3.2% growth and an above average trend. 

The economy is clearly improving then, as it is in the United States. Europe remains a basket case. Japan is improving and China growth remains very high.

This background gives some support to the thought that yes the stock market is high at the moment but it is not over-valued. 

Another support to equity markets is the idea of asset rotation, from low yielding bonds to higher yielding equities. Until recently evidence was flimsy with most equity buying being a rotation out of low-yielding cash.

A recent article in the Financial Times suggests however that the rotation out of bonds is underway. Some of the largest investment funds in the US are university endowment funds. Many have scaled back their government bond holdings from as much as 30% in 2008/09 to zero in some cases. 

It would only take a sea change to the way pension fund liabilities are considered in the UK to see a massive rotation here. Predicting stock markets is to be a hostage to fortune, but the momentum suggests higher levels.

Anthony Platts is a Chartered Fellow of the Chartered Institute for Securities & Investment and a Divisional Director in the Teesside office of Brewin Dolphin, and can be contacted on 01642 608855.

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