London index fades at sight of record

It was another day of nearly but not quite. The FTSE 100 looked briefly to have conquered a record closing high set during the technology bubble, then capitulated once more.

The FTSE has been a notable laggard among the world's equity benchmarks, many of which have been setting fresh records in recent months. While the UK blue-chip index has nearly doubled from its 2009 low, its peak close of 6,930.20 - which was briefly passed in early trade on Monday as the index went to 6,943.61 - and intraday high of 6,950.60 have proved insurmountable. Monday was the 42nd time in the past two years that the FTSE ended within 100 points of the record close.

"It may take another couple of sessions, but it will still be psychologically important and when it happens one could see the index putting on another couple of hundred points as a victory lap," says Richard Buxton, head of UK equities at Old Mutual Global Investors.

Mr Buxton adds that investors are being shown the power of quantitative easing to lift asset values and indices. He says that though some felt a bit "QE-easy" about it, they were being pushed out along the risk curve as the policy intended.

Fund flow data support the idea that investors' risk appetite has returned. Bank of America Merrill Lynch analysts say EPFR last week showed "awesome" net inflows of $5.8bn into European equity mutual funds - the sixth consecutive week of inflows, totalling $21bn.

Money market outflows of $11bn underline this shift of sentiment from safety towards greater risk. But European equities were the main beneficiaries, with outflows of $1.2bn from US equities - which have seen outflows in six out of the past seven weeks - and modest outflows from Japanese equities.

This pick-up in net flows is the second notable return of interest in European equities, which suffered several lean years after the financial crisis. The last revival, which started in 2013, petered out in the first quarter of last year after euro-area purchasing managers' indices turned lower and European growth slowed, both negatively affected by events in Ukraine.

The reasons for the FTSE's underperformance against peers are well understood. Oil and basic resources account for a quarter of the index, compared with just 6 per cent on average among developed markets. The slump for oil and metals prices has been mirrored by the FTSE's large-cap energy and mining indices, which since December have both hit five-year lows.

Another headwind has been the FTSE's bias towards defensive stocks such as pharmaceuticals and utilities, which since October have sharply underperformed cyclical sectors as eurozone economic data looked brighter. Financials are also over represented in the FTSE, making up nearly 22 per cent of the index by weight.

Barclays strategist Ian Scott says banks have "conspicuously not participated in the rotation to date. The biggest problem for investors has been the dilution they have suffered as a result of the sector's need to raise its capital base, offset credit losses and pay for litigation."

So even as investor confidence returned, the UK has remained the world's least popular equity market.

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Optimism in a UK economic recovery is better represented by the mid-cap FTSE 250 index, which is at a record high having risen nearly 18 per cent since mid October. Nevertheless, the blue-chip index has reached a decade-high valuation of 16 times expected earnings, having gained 11 per cent since mid October.

Chris White, head of UK equities at Premier Asset Management, says: "New highs in indices may get some people excited, but we should never take our eyes off the fundamentals. Investors should keep asking themselves if they would be happy to buy shares today and we are struggling to find real value in the FTSE 100.

"Whilst the headline [price-to-earnings] multiple on the FTSE 100 looks superficially attractive, once you strip out financials, mining and oils, it no longer looks that cheap. Most of our ideas are coming from outside the FTSE 100 in the mid- and small-cap indices at the present time, but even here valuations look quite stretched in many areas."

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