FTSE-100: A foot on the rung of recovery?

In October, the FTSE-100 touched 5,217, its highest level since September 2008. Many are perplexed by the 47% increase in the index over the last seven months: some are uncertain whether it is supported by sound fundamentals and believe this is just another stockmarket bubble created by the huge supply of cheap money from governments in the form of quantitative easing. But is it sustainable?

Cripin Odey, one of London’s most respected fund managers, thinks so. In a recent letter to clients, he quipped that “at some point, the [quantitative] easing will have to come to an end, but until it does, this bull market is sponsored by [Her Majesty’s government] and everyone should enjoy it.”

But Odey also pointed out that the rebound makes sense. In a recent Financial Times article he said it was rational to see the value of companies rise from those frozen post-Lehman days, as everyone recognised they were not going out of business. Or as Invesco Perpetual’s chief economist John Greenwood says: “The bounce-back in asset values has simply been a reversal of the earlier flight to safety.”

Now that valuations have corrected somewhat, where will they head next? The answer depends on how rapidly economies can start to grow. There has been some positive UK economic data in recent weeks including a bounce-back in manufacturing, retail sales and house prices, but Greenwood cautions that economic activity is still “at the bottom of the valley.”

In Christmas 2008, Financial Director asked five key finance directors what they expected of the FTSE-100’s performance in the next year. Not a single one thought it would go beyond 4,500 by the year’s close. Being comfortably beyond that already, is it complete folly to imagine it might at least maintain that level?