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OPINION

Party like it's 1999

Party like it's 1999
February 27, 2015
Party like it's 1999

Here at the IC the sense of excitement is somewhat less palpable - breaking even after 10 years is hardly the stuff of investment dreams, especially as in inflation-adjusted terms the FTSE 100 would need to be nearer 9000 to really represent break-even from its 1999 level (reinvested dividends would have done the job, though, as we've repeatedly advised).

The FTSE 100 has been rather late to the party, too, with many other global indices setting new records for some time now. Not least among them is the FTSE 100's little brother, the FTSE 250. It had recovered its own post-dot-com losses by the end of 2004 and at 17172 has virtually tripled since the turn of the millennium. A far more domestically-focused index, that would surely have been a far more tweetworthy reflection of the UK's economic recovery than the progress of the motley bunch of miners, oil companies and banks that dominate the UK's blue-chip index (in aggregate these three sectors account for over two-fifths of its value).

Let us not forget, either, that the '99 stock market party ended with a massive hangover. The subsequent sell-off lasted for three years and saw the market all but halve to a nadir of 3613.3. Should we be concerned about a similar collapse today? I don't see the same irrational exuberance writ large in aggregate valuations, at least not here in London. In 1999 the FTSE 100's trailing PE was in the 30s; today it is 17. The FTSE 100 is yielding 3.6 per cent; in 1999 it was 2.4 per cent - and that's an especially important measure as dividends are known to have good predictive power for future returns.

But the FTSE 100's prospects may be out of its hands. The S&P 500 and Nasdaq are looking much more overvalued, dangerously so according to Professor Robert Shiller, the brains behind the cyclically adjusted measure that suggests US stocks are in bubble territory. If a correction is on the way London's markets will surely suffer, too.

Finally there are those who believe that the recovery of equity markets to make new highs is nothing more than a side-effect of loose monetary policy in the form of QE. Not least among them is hedge fund manager Seth Klarman, who said that "for six years and counting, optimists have been relentlessly rewarded, and skeptics [sic] punished". He's sticking to his value principles in the same way that the late Tony Dye famously stuck to his prediction that the 1990s market party would "end in tears". I wouldn't bet against Mr Klarman, like Tony Dye, having the last laugh.