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MARKET COMMENT
By
Carburton Street, London -- After peaking at 6,930.2 on the final trading day of 1999, it's been downhill ever since for the FTSE 100. This morning, the London stock market remains in freefall. The UK's benchmark index currently stands at around 4,400, having fallen nearly 37% in less than two years. Just how low can the stock market go? The last time the UK stock market fell for two consecutive years was 1973 and 1974, in the days of raging inflation, the oil crisis and three-day weeks. Taken from the book Bulls versus Bears, here are the valuations of some familiar companies at the nadir of that most severe of market downturns.Company Market Dividend P/E
Value Yield
(£m) (%)
British Oxygen 35 19.5 3.3
BP 755 12.8 2.6
Grand Metropolitan 57 20.1 2.4
ICI 575 14.0 3.5
Lloyds Bank 125 10.1 2.1
Nat West 175 12.1 1.9
Trusthouse Forte 35 26.4 2.9
Some grim valuations there. At the bottom, the FT 30 yielded 13.4% and was on a P/E of 3.8. Of course, those figures have to be put into context with non-equity valuations. Gilts, for instance, yielded around 13% at the time, a figure similar to the FT 30's then dividend yield. With that equality in mind, and with gilts currently offering nearly 5%, today's FTSE 100 would have to fall to around 2,800 beat the 1974 nadir. Yikes!
However, any attempt to calculate or judge the stock market bottom is futile. Nobody knows just how miserable, how depressed the last seller of stock will be before the market turns. In the current climate of stock market panic, ordinary share investors should use their time in a more constructive manner. In short, welcome the latest declines by either i) continuing to contribute to an index tracker, or ii) identifying good long-term businesses selling at attractive valuations, of which there are plenty at the moment.