FTSE to Top 7,000 Points by Year-end?

THE WEEK: Rodney Hobson explains why he would not be surprised if the FTSE 100 topped 7,000 by the end of the year

Rodney Hobson 10 May, 2013 | 11:33AM
Facebook Twitter LinkedIn

The Temperature Rises

The first daffodil and the first cuckoo come round as regular harbingers of spring but one seasonal signal of the approach of warmer days has fallen out of fashion at this time of year, tending to emerge belatedly in September. It is the first, erroneous, claim that investors do well to sell in May.

This old mantra has proved to be bad advice so often that pundits who cling to it unthinkingly prefer to wait until the St Leger has been run before trying to twist the statistics round in an attempt to prove the un-provable.

Well, May is here and the FTSE 100 index has just topped 6,600 points to reach its highest level since the financial crisis took hold. Amazingly, we are now within 400 points of the highest level that the FTSE has ever reached, a record set 13 unlucky years ago before the tech bubble burst.

One has to concede that the market looks fully priced. If anything it is possibly a shade overpriced now, with an awful lot of good news factored in. The eurozone crisis has not been solved and will erupt again before the year is out. Growth in the UK remains slow and although the US is well over the worst it is not exactly powering away. Japan’s new economic policies have yet to demonstrate that they will work wonders after years of stagnation, India has run out of steam and China is over the top.

This could, one has to admit, be one of the minority years when it really does pay to sell in May. Having argued over the past five years that investors should buy on dips, a policy that has proved remarkably successful, perhaps I should now be saying sell on the upsurge.

However, I am not going to do so. It is true that the argument for investing is much more difficult to make than it has been over the past 12 months and, having already put half my ISA allowance for the current financial year into stocks before they rose too far, I am holding off committing any more cash at this stage.

That is not the same as saying that it is time to get out. The main lesson to be learnt from studying charts of past years is that if any market trend is set in motion in the first four months of the year, that trend is likely to continue throughout the summer.

There is no disputing that here in the UK the trend in share prices so far this year has been upward, and quite consistently upward at that. We are not alone. Indices in the US have already set new records and I would not be surprised if the FTSE 100 topped 7,000 by the end of the year, although I think something a little more attainable, say 6,800 points, is enough to hope for.

The main UK index is at any rate already lagging the FTSE 250 index of medium sized companies, which has topped its turn-of-the-millennium level. A bit of catching up at the larger end of the stock market would not be amiss.

In any case, if you do sell now you will miss out on the dividend paying bonanza throughout the summer. Dividends are, on the whole, rising and many companies have cash piles to fund increasing payouts even if the going gets tougher in the short term.

In my view, the UK economy is coming off the bottom. While the recession that has now lasted nearly six years continues, with dips and peaks along the way, we are at last seeing some hopeful signs. I do not believe that the 0.3% improvement in the first quarter was a blip and I am confident that the second quarter will produce modest growth.

Despite the squeezing of household incomes, car sales have picked up strongly, so there is some money kicking around. Manufacturing is still struggling but is occasionally succeeding. Even the banking sector is showing signs that it has turned the corner.

The message is then: hang in there for the summer, and if you want to invest you need to scrutinise individual companies more thoroughly than usual. Don’t be put off. Shares are still the best place to be.

Rodney Hobson is a long-term investor commenting on his own portfolio; his comments are for informational purposes only and should not be construed as investment advice.

Most Popular on Morningstar.co.uk This Week

The 12 Safest Dividends in the UK?
Morningstar analysts dig the data to try to find the most stable dividend-payers on the UK market. 

Balfour Beatty? Balfour Beat Me!
THE WEEK: A second profit warning from the infrastructure and construction group has Morningstar columnist Rodney Hobson wishing he’d heeded the hidden warnings. 

10 Most Popular Investment Trusts in Q1
The 10 most searched for investment trusts on Morningstar.co.uk in the first quarter show investors are sticking with simplicity despite the trend for alternative fund launches. 

The Top 20 Dividend Stocks
DIG THE DATA: Morningstar data reveal the 20 highest yielding stocks on the FTSE 350 for February 2013. 

Jim Rogers' Gold Investment Philosophy
The maverick investor explains why he prefers to hold gold coins and his rationale for gold prices to continue to rise over the next decade.

The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional before making an investment decision.

Facebook Twitter LinkedIn

About Author

Rodney Hobson

Rodney Hobson  is a columnist for Morningstar.co.uk and author of several investing books, including The Dividend Investor and How to Build a Share Portfolio.