The Garrulous Jay – All Time High

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Yesterday the FTSE 100 index of the UK’s largest stocks closed at an all-time high of 8,078.86. This continues a remarkable four year run since the Covid trough of the 23rd March 2020, which has seen the index gain 87.31% (source: FE Analytics).

As the lyrics of “All Time High” (theme song for the James Bond movie Octopussy) go, this might be taken as an indication that the UK stockmarket is about to “change all that’s gone before”. The truth is it needs to, but I have my doubts.

The performance of the FTSE 100 over the last three months has been superficially impressive as its gain of 8.76% has outpaced both the MSCI All Companies World Index (+6.40%), and the US S&P 500 index (+5.26%), to take just two comparators.

Once one starts to dig below the surface and extend that timeline, however, the charts start to tell a different story. One only needs to go back as far as the start of the year to see the index trailing its global and US benchmarks by 1.81% and 2.53% respectively.

Extending the performance of the indices back to that deep Covid trough and the underperformance of the UK index becomes far starker. The MSCI ACWI index has gained around 12% more than the FTSE 100, and the S&P 500 index has outperformed by just over 34%.

The rather obvious conclusion one can draw from this is that charts can be deceiving.

Firstly, carefully picking the time period over which one decides to illustrate performance is one of the oldest tricks in the book for stock analysts and fund managers alike. Throwing in some carefully selected comparators or benchmarks can further tilt the picture.

The second issue with charts is that they are by their nature historical. They tell us what has happened, not necessarily what will happen. They can therefore serve as a dangerous comfort blanket where there may be no justification for one.

Thirdly, charts work well under normal market conditions, but struggle to predict step changes, be they in stockmarkets or in individual companies’ share prices. This is partly because they effectively dehumanise and therefore decontextualise performance: they fail to address the “why” when it comes to performance.

Here the FTSE 100’s recent rise is a good case in point. Two of the drivers of the index’s rally have been currency and takeover activity.

A significant number of FTSE 100 constituents generate their income in US dollars. As the dollar has strengthened this has served to increase these companies’ revenues and profits when they are translated into sterling. An artificial boost that has less to do with fundamental strengths.

Similarly, takeover activity might be seen as an indication of the attractiveness of UK companies. True, but this in turn could simply reflect their undervaluation. Furthermore, every successful takeover serves to further diminish the UK stockmarket in terms of its size and therefore its relevance.

As the song goes, therefore, I fear the recent performance of the FTSE 100 may be little more than “a sweet distraction for an hour or two”.