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Contact us | www.future-financial.co.uk | E-mail your comments | Archive | |
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Undervalued markets Despite the best efforts of the press to scare us all with tales of doom and gloom, not all the news is bad if you take a long term view.
The long term is, after all, what investments are all about. The FTSE100, which covers the largest companies in the UK, has been running in its current form for just under 25 years now. Starting in April 1984 at a base of 1,000, it ended December 2008 at 4,434, well down from its high point of 6,930 at the very end of 1999. At that time many commentators were concerned that most world stockmarkets were overvalued and that a correction was inevitable. Which, of course, is what happened during the early years of this decade; with the FTSE100 falling to 3,287 in mid-March 2003. It then rose back again reaching 6,732 in mid-June 2007 before falling back to its current level. Why the history? First we wanted to demonstrate that markets are volatile and should be viewed only over the longer term; they are influenced by external events such as the credit crunch, just as much as by the inherent stability of companies and their ability to continue paying dividends to investors. The second reason, however, is that we wanted to draw attention to the long term trends inherent in the figures. By creating an 'average' of the FTSE100's daily closing prices over the entire period, we can add a 'trend' line showing the long term 'value' of the index. What is really interesting is that the index is currently some 30% below its long term trend line. This could, of course, simply reflect that the market was, indeed, overvalued and therefore represents a correction that will remain in place for some time. But this would assume that markets act in isolation. In fact, they are influenced not just by economic factors but also by the pressure of money available for investment. For the past year, money has become relatively scarce as people sell assets on a falling market and feel less well-off because of falling house prices. This has exacerbated the problem of falling share values as there have been fewer investors chasing an increasing number of available shares. However, this is creating pent-up demand amongst individual investors, who need to make provision for their retirement, and institutional investors, seeking a home for their funds. The future is bright The result of this is that we can expect share values to bounce back at least in the direction of their long term trend, as soon as confidence starts to return to the market. It is possible that the election of Barack Obama as US President will be an engine of growth. It is important to remember that the actual components of any index such as the FTSE100 - the companies which are used to calculate its value - are not constant. Mergers, acquisitions, new entrants and the decline of some old companies combine to ensure that the index constantly reflects the fortunes of the largest companies in the UK by market value. This, to some extent, reflects the health of the economy but not entirely because market sentiment is also important. Only one thing is sure; uncertainty will continue for some time. As ever, you should take individual professional advice before making any decision relating to your personal finances. The value of investments is not guaranteed; you may get back less than you put in. Key Points: > Investments should be seen over the long term > Shares are currently well below long term trend > Now could represent a buying opportunity |
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©futurefinancial This publication represents our understanding of law and Inland Revenue practice as at the date of publication. It does not provide individual tailored investment advice and is for guidance only. Rules may vary for Scotland and Northern Ireland. We cannot assume legal liability for any errors or omissions it might contain. Levels and bases of, and reliefs from taxation are those currently applying or proposed and are subject to change; their value depends on the individual circumstances of the investor. The value of land and buildings is generally a matter of a valuer’s opinion rather than fact. The value of investments can go down as well as up and you may not get back the full amount you invested. The past is not a guide to future performance and past performance may not necessarily be repeated. If you withdraw from an investment in the early years, you may not get the full amount you invested. Changes in the rates of exchange may have an adverse effect on the value or price of an investment in sterling terms if it is denominated in a foreign currency. Your home may be repossessed if you do not keep up repayments on your mortgage. Loans are subject to status and written details are available on request. Always seek independent advice from a qualified financial adviser. Think carefully before securing other debts against your home. Fees for mortgage advice maybe charged and for details of these please contact us. The Financial Services Authority does not regulate all the activities undertaken by the company, including taxation advice and overseas mortgages. |
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