A new all-time high

After threatening to do so a few times over the past year, the FTSE100 finally reached a new all-time high on Tuesday afternoon, passing the previous recorded at the end of the last millennium, just before the dotcom bubble burst.

The FTSE100 yesterday set two new records - a new intraday high of 6958.89 during the day, before settling back to end on a new closing record of 6949.63, up 37.47 points.

Following the earlier encouragement provided by the Eurozone quantitative easing (QE) programme announced this month, the markets have been further boosted by growing investor optimism about the Greek situation as well as reassurance from the US Federal Reserve on interest rate rises.

So does this record hold any real significance for investors? Rationally, the answer should be no, but it will have an impact. Whilst the record is largely symbolic, it does have a major psychological significance and could lead to a bit of a feel-good factor. Across the globe, other indices have continued forward after reaching new highs.

The reality is that the FTSE 100 is a very different animal to the one that set the previous record on 30 December 1999. This was the time of the tech bubble, and so telecoms and technology firms comprised 23.4% of the index. They now account for just 6.7%.

Today, the index is dominated by raw materials, with the oil & gas and mining sectors accounting for 22% of the FTSE100, compared with 15.1% back in 1999. The banks are also less important now, having slipped back from 16.6% then to 12.9% now.

For investors, this new high would seem to draw a line under the previous traumas of the dotcom bust and the financial crisis. Some might now think about coming back to the market. Obviously this would appear to be conforming to the classic investor behaviour of buying at the top of the market. But would it really be such a bad time to buy? According to many experts, UK shares are still undervalued.

The Daily Telegraph points out that back in 1999, the price to earnings (p/e) ratio of the FTSE 100 stood at more than 30, whereas today it is nearer 16. As the long-term average is around 15, it would suggest that today it is at a discount of 7%.

For other investors, the level of the index is only half the story. Many are more concerned about income and the FTSE 100 currently yields around 3.4%, with no further tax to pay for a basic-rate taxpayer. This is much better than you can currently get from any savings account.

A starting income of 3.4% net with the chance of future rises offers an attractive alternative to annuities – food for thought for the newly retired as the new pension freedoms are about to come into effect.

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