Investors indifferent to FTSE highs

One might have thought that the FTSE 100’s ascent to record highs, coupled with the Nasdaq closing in on March 2000’s all-time peak, might catalyse a little excitement among investors.

However, there’s precious little on display, judging by the deluge of commentary bemoaning the miserable returns of the last 15 years. Even if one includes dividends, the FTSE has barely beaten inflation, while the Nasdaq’s performance has been even poorer.

Many amateur investors instinctively see new highs as indicative of overvaluation, and fear market selloffs are in store.

Fund managers are similarly lukewarm; Merrill Lynch’s latest monthly survey found a net 42 per cent plan to underweight the UK over the next 12 months.

Current technology valuations, however, are nothing like the heady days of old, with the biggest companies generally sporting huge cash piles and undemanding valuation multiples.

As for the FTSE, it trades on 16 times earnings, compared to 30 in 1999, and offers a dividend yield of 3.4 per cent. It trades on a cyclically adjusted price/earnings ratio (Cape) of 15, according to Barclays, below historical averages.

Neither the FTSE nor the Nasdaq are obvious bargains, by any means.

However, the current investor disinterest is a good thing – market tops are marked by euphoria, not indifference. European sentiment euphoric If there's euphoria anywhere, it's in Europe.

Investors have been “shovelling record sums” into Europe, as US firm TrimTabs put it, helping the Euro Stoxx 600 to a 15 per cent gain in 2015 – its best start to a year since records began in 1986.

Institutional investors expect further gains, with Merrill’s aforementioned fund manager survey finding a record net 51 per cent plan to overweight European equities this year.

It is, says Merrill, “as if there is not a single bear left”.

Technically overbought, excessively bullish sentiment, valuations that are now well above their 10-year average – stocks are obviously vulnerable in the event of any geopolitical or economic shock.

However, Europe’s positives – ECB stimulus, improving corporate and economic momentum, and valuations that remain much lower than those seen in the US – are not going to vanish any time soon.

Just as US equity pullbacks in 2013 and 2014 were short and shallow, institutional enthusiasm for Europe means any dips in 2015 are likely to be similarly brief affairs.

Margin debt is declining Some bears like to warn that margin debt – money borrowed to buy shares – is near record highs.

As we’ve noted before, this means nothing. Some investors will always use margin, so margin debt tends to rise as markets rise.

Interestingly, US margin debt peaked in February 2014. It has gradually declined since, and has now fallen just below its 12-month average.

Some analysts note the same phenomenon played out in 2000 and 2007, with margin debt peaking in advance of the overall market.

Is the recent margin debt decline significant?

Probably not – pointing to a few previous market peaks is hardly statistically significant.

However, the margin debt figures are nevertheless revealing.

Far from indicating speculative excess, they indicate growing investor caution.

Momentum indicates gains Indeed, the power of momentum means the short-term outlook remains positive for global equities in general.

The MSCI World Developed Markets index hit new highs last month, prompting Nautilus Research to look for other examples where global stocks hit their first one-year high in more than three months.

There have been 12 such instances since 1995. Three months later, stocks were higher on 11 occasions. Gains averaged 4.1 per cent, well above the average three-month gain.

Six months later, stocks were higher on all 12 occasions, averaging gains of 8.3 per cent, compared to the average six-month gain of 3.2 per cent.

For the next six months at least, it seems, the trend is your friend.

Forget tech, buy tractors Back in the late 1990s, everyone was looking for the next Microsoft, the next high-flying growth stock that would soar to the stars.

Corporate ascents can seem obvious in hindsight, but buying so-called lottery stocks rarely pays off, as anyone who invested in the Nasdaq 15 years ago can testify.

However, a handful of Nasdaq 100 stocks did buck the trend.

One stock soared by more than 50,000 per cent since 2000; another gained by some 31,000 per cent, while gains of roughly 8,000 per cent and 4,000 per cent accrued to two other Nasdaq 100 stocks.

Who are these high-fliers? What kind of pioneering breakthroughs did they make?

The biggest winner was energy drink maker Monster Beverage, followed by coffee firm Keurig Green Mountain, farm retailer Tractor Supply, and auto parts firm O'Reilly Automotive.

Energy drinks, tractors, auto parts – the big winners sometimes reside in the least obvious of places.