After a brief summer shakeout, London shares recently touched a 5-1/2 year high. Find out what's been driving the market.
The FTSE 100 index rose to a five-and-a-half year high of 6,172 points last week. But it was only five months ago when some pundits were warning that shares may slump.
At the time, there were worries that higher interest rates may send shares lower. A fund manager at EFG Asset Management, which oversees £1.2b worth of investment, reportedly said, "We took some money out of European stocks." Meanwhile, AXA Investment warned, "European stocks are set to take some hits." But they weren't alone. An equity strategist at Charles Stanley cautioned, "Investors are taking some chips off the table."
And as it happened shares did fall from April to June. The FTSE tumbled 480 points with oil majors and miners leading the retreat. BP
(LSE: BP.)
lost 14%, Royal Dutch Shell
(LSE: RDSB)
slid 11%, and BG Group
(LSE: BG.)
stumbled 15% -- together they accounted for a third of the FTSE's summertime slump.
Miners were in bad shape, too. Rio Tinto
(LSE: RIO)
receded 12%, Anglo American
(LSE: AAL)
retreated 17%, and BHP Billiton
(LSE: BLT)
tumbled 16%. Collectively weak miners contributed to more than 12% of the FTSE's decline from April to June.
However, after the short shakeout London shares have recovered all of its losses. Interestingly, miners and oil majors have had less of an influence on the revival. Here are ten of the best performers in the FTSE ranked in order of their contribution to the benchmark index's rise.
Significantly, this time a wide range of companies has helped to drive the rise in shares from June to October. Notably banks, which were flagged up as ostensibly cheap here and here, accounted for almost a-fifth of the FTSE 100 rise. Telecoms, pharmaceuticals and recovering miners have also helped to fuel to FTSE's improvement to its five-and-a-half-year high.
As you would expect, the FTSE's latest revival has again sparked debate over where London shares may be heading. Old chestnuts such as inflationary pressures and interest rates are again the main concerns, and there are some new issues to frighten investors, too. These include tensions in the Middle East, and nervousness over a slowdown in growth in China.
But as I see it, what matters is whether shares are cheap -- and they are! The P/E of the FTSE, which stands at 13, is at its lowest level since 1994. Additionally, dividends are growing at a healthy lick, which suggests that companies are generating plenty of cash. What's more, mega takeover deals such as Tata Steel's recent purchase of Corus Group
(LSE: CS.)
may be further evidence that the market is cheap.
Of course, there will always be people who are less convinced about the prospects for the market, which is healthy. I think the time to be concerned about the stock market is when there are no more sceptics around -- but I suspect there may be a long way to go before that happens.
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