FTSE All-World index hits record highs
Equity markets have been rallying on Wednesday with the FTSE All-World index reaching record highs. Inflation expectation and a belief that the cycle has turned powered the rally. The FT's John Authers and Jamie Chisholm discuss whether it will last.
Produced by Alessia Giustiniano. Filmed by Rod Fitzgerald.
Welcome to FT On Air from London. The FTSE All World Equity Index reach record highs today. My name is Jamie Chisholm, and I'm joined by John Authers, the FT Senior Investment Commentator, to discuss this. FTSE All Share, All World Index-- record high today.
What's going on?
In a nutshell, a lot of people are betting that we really have reflation and growth back on our hands once more-- that it varies from country to country, where we've got to in the cycle. But there is a belief, more or less any way you care to mention, that we are shifting towards growth.
There's nothing new. It's not just a matter of Donald Trump putting America first. We've had, ironically, ever since Standard and Poor's downgraded US credit back in 2011, US stocks have hugely outperformed the rest of the world. The rest of the world is still a long way below the high it set just before the financial crisis. So plainly, the US remains very much in the driving seat. And plainly, part of that is a generalised optimism about Donald Trump.
In terms of valuations, what alarms me very greatly is the US. I do still believe in the Shiller Cape measure, which is where you look at a multiple of earnings over the last 10 years, rather than just one, because multiples do tend to correct for where they think stocks are in the cycle.
And on that basis, we're almost up to 29 times now. It's only been higher than that twice ever, which was before the great crash of '29 and the top of the dot com bubble. That plainly has to be a concern. And it's not as though it's only the Cape that gives you that kind of negative picture. If you look at price to sales, for example, a lot of the strength of US stocks is down to financial engineering and to arguably unsustainable high profit margins.
If you look at high price to sales, similarly, that shows the market actually being more expensive than it was at the top of the dot com bubble. Outside the States, the rest of the world, there aren't too many countries that look that egregiously overvalued. And there are quite a few that look cheap.
Conceivably, it could move into a true bubble phase. I don't think-- I think it's a misuse of the word "bubble" to say that the US stocks or certainly world stocks are in a bubble at this point. It's not as though people are euphorically buying stocks hand over fist, believing that they'll go up so that they can sell it to somebody else, which is what we tend to mean by speculative bubble.
But US stocks are plainly overvalued at the moment. And it looks to me as though what you should be doing is buying more or less anywhere else more than you are buying in the States.
Apple very famously managed to hit a new all time high yesterday. Apple's a very big company. And as you can see, again, however, that's not necessarily that new story-- that tech has been very excitingly driving the rest of the world for a long time.
The other very important aspect is banks. Financials are also a large chunk of world stocks. Every country has its own banking sector. And they have also done very well indeed in the last few weeks on the belief that rates are rising.
What's strange is that rates-- for most stocks, rates rising is not a problem. For banks, thanks to the way they make money from a steeper yield curve, it is fairly straightforward at this point that any belief that we're going to get higher rates will help their share prices. And Goldman Sachs is another famous name, hit a new all time high.
You plainly have an uptick in inflation expectations everywhere. It's not a pure Trump effect. Even Germany, which has obviously had a horrendous--
Yes. Even Europe, the inflation expectations are higher than they were before. Here in the UK, largely thanks to what's happens to sterling since the Brexit referendum, our inflation expectations have gone up very sharply. If that means that companies do have pricing power, if that means that equities become more attractive than bonds, which plainly, they do, then yes, the likelihood of extra inflation is probably the single biggest driver.
And the thing that is strange to me-- it's completely logical that bank shares should be strengthening in this environment. You should also be expecting rates to rise. As I think you know, I thought Janet Yellen was about as hawkish as she could realistically have been in her testimony yesterday. That shouldn't be great for stock valuation.
What could really give us a bursting of a bubble would be a disorderly rise in bond yields following on from a rise in rates from the Fed. That has been the nightmare for some years. It has still not gone away. In some ways, the bubble that would burst would be the bubble in bonds. But if you have a really sharp increase in bond yields, then--
That would affect equities as well.
Equities would have a very serious fall.
If through nothing else, because people start getting stressed.
Yes. That is the great-- in terms of the things that are endogenous to the markets, that's what could really upset the apple cart.