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HR News Update – Crisis over? What the GDP figures mean for UK investors

HR News Update – Crisis over? What the GDP figures mean for UK investors

GDP has risen above its pre-crisis peak, the ONS reported today, while the IMF told us yesterday the UK is expected to be the fastest growing advanced economy in 2014. From Hargreaves Lansdown.

So what does this mean for investors in UK shares?Here we look at two measures which shed some more light on the stockmarket now, compared to the pre-crisis peak; price Earnings Ratio- now and then; Investor Confidence Index- now and then and Our view of UK investment suggestions:

P/E Analysis

The Price/Earnings Ratio of the UK market currently stands at 15.6. This compares to a P/E Ratio of 11.5 in Q1 2008 when GDP was at its former peak.However, the stockmarket is a leading indicator of the economy, so it moves up and down first. The pre-crisis peak in the stockmarket actually occurred in summer 2007, at which point the P/E Ratio stood at 13.6. It is perhaps more instructive to look at the long term average for the UK market, which is a P/E Ratio of 14.

 

Date

Event

UK P/E Ratio

     

Dec 1999

All-time FTSE 100 high

26.7

July 2007

Recent FTSE 100 high

13.6

March 2008

Former GDP peak

11.5

July 2014

Now

15.6

(Source: Datastream)

So what does this tell us about the price of UK shares? Well it tells us that the UK stockmarket is currently optimistic about the prospects for corporate earnings.  However- a bit more context- we are nowhere near the heady fervour of December 1999, when the P/E Ratio of the UK market hit 26.7. The Hargreaves Lansdown Investor Confidence Index currently stands at 114. This compares to an index value of 61 in Q1 2008 when GDP was at its former peak. This suggests by that time, investors were already bracing for a rough ride. However in the summer of 2007, the index stood at 100. The long term average of this index is 101. The index stood at 119 in December 1999 and peaked at 129 in January 2004. Again this points to the fact that investors are currently in buoyant mood about the prospects for the stockmarket. Indeed 72% believe the UK stockmarket will be at a higher level in 1 year’s time.

Laith Khalaf, Senior Analyst, Hargreaves Lansdown: ‘Forecasting the actions of central bankers, politicians and the aggregate economy has become a routine activity in financial markets, but by its nature is riddled with unpredictability. We prefer to focus on long term valuation measures, like P/E. These suggest the UK stockmarket is neither very expensive nor very cheap, it sits somewhere in the middle. Markets are notoriously difficult to time well, and investors are better off focussing on their investment goals, and saving accordingly. UK investors who are concerned about current valuations might consider drip feeding money into the markets via a regular savings plan.’

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