Investing in shares - beware FTSE fever

The FTSE 100 has been on a strong upward march, recording growth last year of more than 16%. In January the Confederation of British Industry released results from a survey that showed optimism within the Square Mile is flying at a two year high.

The report covered all aspects of the financial sector including banks, stockbrokers and insurance firms. It showed that around 30% of these companies said that they had hired more staff. Is the market's growth expected to continue? The general consensus in the City is "Yes" but perhaps not at the same levels as last year.

During the first three quarters of last year foreign firms spent around £30 billion in acquiring UK firms. The FTSE 100 index, apart from the odd wobble or two, has not looked back. However, it is important not too expect similarly high levels of growth to continue.

Plenty of investors have believed in never-ending trends in the past and after investing money into a FTSE 100 tracker fund, subsequently wished that they hadn't.

Remember that the FTSE 100 is comprised of the largest 100 companies in the UK. However, only a small proportion of these firms account for a large percentage of the index as a whole. BP and Shell, for example, account for nearly a quarter of the value of the index and should they drop significantly, then it stands to reason that the index will follow.

New Star Asset Management believes that investors in tracker funds are over-exposing themselves to specific risks in oil, pharmaceuticals, banks and commodities shares. Whilst record oil prices of last year may have attributed largely to the FTSE's overall growth, shares in Shell didn't fair too well.

Phil Wagstaff, Managing Director of marketing at New Star says, "Big is not necessarily beautiful. When buying a FTSE 100 tracker, you are hostage to the fortune of just a handful of companies."

Shares continue to remain appealing for many private investors. The problem is that we have overstretched ourselves financially in recent years. However, as long as unemployment levels remain low, along with interest rates, then a slowdown in consumer spending, which whilst painful for the retailers in particular, should not have too much of a knock-on effect throughout the economy as a whole.

In fact, of greater concern than indebtedness in the UK is the US economy. It looks like the UK housing market bubble is deflating gently, achieving a relatively soft landing. The USA may not be so lucky. US consumers too have racked up enormous debt in recent years. These debts along with an unstable and overpriced housing market have led many economists to believe that the USA may be the biggest threat not to just our own markets, but to the global economy overall.

Levels of expected stock market growth for this year vary. The gurus don't always get it close to right - take 2001 as an example, average growth was forecast at 17% but the market actually fell 16%; 2002 was similar. Growth of 13% was predicted but unfortunately the market dropped 13%. Forecasts for this year range from between 4% and 10%. Although this is quite a broad spectrum, we should be grateful for one thing - that the economists and brokers at least agree that some level of growth is expected this year!

27 February 2006 © Moneyextra.com

back

Moneyextra.com recommends you should consider taking independent financial advice before acting on any article. Please contact us for help with your individual circumstances if any assistance is required.