Following new highs reached on Friday by the FTSE, investors should remain cautious in their investment approach, warns a leading at analyst at one of the world’s largest independent financial advisory organizations.
The FTSE 100, a share index of the 100 companies listed on the London Stock Exchange with the highest market capitalization, closed at at its highest point in history and hit through the ‘psychologically important 7,000 point mark’ on Friday evening.
Tom Elliott, International Investment Strategist at deVere Group commented:
“We are nervous of buying into a rally that is less about improved corporate earnings forecasts, and more about delving into the tea leaves of statements from the U.S. Fed regarding Janet Yellen’s use of the word ‘patient.’
“We must remember that underlying the six-year rally in risk assets, which began in March 2009, is massive central bank intervention in the form of ultra-low global interest rates and quantitative easing (QE). This has disabled the financial markets’ ability to signal changes in the real economy, leading us to be very cautious over buying into any rally.”
Elliott urges investors to remain diversified and not to read too much into the recent new high on the FTSE 100. He explains:
“Several factors have helped drive the FTSE 100. First, is the more dovish tone coming from the Fed, notably a fall in its projection of future interest rate hikes. Since most of the world’s cross-border borrowing is done in dollars, that is good news for countries running trade deficits, such as the UK, and for companies seeking finance in order to expand. The UK blue chip index has risen along with other major markets. However, it does highlight how dependent global stock markets have become on the current Fed funds rate of almost zero.
“Second, the FTSE 100 has at last benefited from having a sizable weighting (around 15%) in oil and gas companies. This has been a drag on its performance over the last twelve months, but a favorable change in taxation by the UK government on North Sea assets, announced at this week’s budget, triggered a rally for the sector.”