Another day, another record for the Footsie. It’s an extraordinary contrast between the joyful reaction on the stock market – not only the FTSE 100 but nearly all the major indexes – and the long tally of reasons to be glum.
There’s the US government shutdown, tariffs, sanctions on Russia, unsustainable public finances not only here but just about everywhere, inflation nudging up, and of course the deeply disturbing geopolitical situation.
So what’s the explanation and, more critically, what comes next?
As far as the Footsie goes, there are three key points: One is that it is about the world economy, not the UK. Taken as a whole, 80 per cent of the earnings of its members come from abroad, either as exports or from foreign affiliates.
Two, it is largely owned by foreigners too. The proportion of the UK market as a whole that is foreign-owned has been climbing steadily and reached 58 per cent at the end of 2022. Given what we know about foreign buying in the past few months I would guess it is well over 60 per cent now.
And three, it is still cheap. The Footsie is on a price/earnings ratio of 14, against 18 for European shares on Euro Stoxx, and 23 for the S&P 500 in America.
Boom: Viewed from abroad the UK looks a decent place to invest, particularly since foreigners don’t have to pay our taxes
So viewed from abroad the UK looks a decent place to invest, particularly since foreigners don’t have to pay our taxes.
So to the wider point – that stock markets everywhere are hovering around all-time highs. This must have something to do with global liquidity. The world is still awash with all that money printed by the central banks, funds that are still hunting for a home.
But I think it is also a reflection on the remarkable resilience of the global economy in the face of everything thrown at it. The world’s giant enterprises have had to face all the things noted above yet are still producing decent earnings, increasing sales and paying higher dividends.
A note from US fund manager Capital Group points out that global dividends were up 7.7 per cent in the first half of this year against the same period in 2024.
In the UK they are up only 3.8 per cent, but 92 per cent of British companies either held their dividends or increased them.
Of course it is early days, but world trade so far does not seem to be seriously damaged either by sanctions or tariffs.
I was talking to some shipping people last week who said one of their great problems is that ports can’t cope with the volume of trade. Ships are anchored outside ports for days waiting to unload.
So what happens next? Well, it would be absurd not to acknowledge the widespread concern that some sort of market crash is around the corner.
The extraordinary valuations on the big US technology companies are, well, extraordinary.
Nvidia is at $4.6 trillion (£3.4 trillion), Microsoft $3.9 trillion and Apple just behind at $3.8 trillion. Is each of the three really worth more than all the FTSE 100 companies put together?
It all feels frothy, and for those of us old enough to have seen quite a few stock market cycles suddenly head downwards, it is uncomfortable. I would not be at all surprised if there were a nasty reaction pretty soon.
But you have to make a distinction between markets and the real economy. There may be a market glitch, but the world economy does not look in bad shape. There is spare capacity. Consumers still have savings. In fact UK household savings are unusually high, though that may be because we know we will be clobbered with higher taxes next month.
And it looks like, if there is indeed a global slowdown, the world’s central banks will cut interest rates and prop things up.
If they manage to do so, company profits will rise too, underpinning share prices worldwide.
Behind all this is the truth that there is a global economic cycle. There are years of growth, then every decade or so something comes along to wallop the world economy into a serious recession.
It would be great if we knew how to smooth the cycle, to iron out the bumps, but we don’t. My guess is the next big recession is more likely to come in 2028-29 than in 2026-27 or 2027-28. And the markets seem to think that too.
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