LONDON -- The FTSE 100 (INDEX: ^FTSE) breached 6,000 for the first time since July 2011 today, rallying 2.2% following a last-minute deal by American politicians to avoid the so-called "fiscal cliff."
To me, at least, the crossing of the purely symbolic 6,000 level -- via a strong rally on the first trading session of the year -- begs an obvious investment question: What now?
In particular, is this finally the rally that sees the market break out beyond the 6,000 level toward fresh highs? Or is today just the latest in a long line of false market dawns?
I mean, the FTSE 100 first breached 6,000 during April 1998 -- more than 14 years ago -- and last traded in excess of 6,000 for any length of time back in 2007.
Fourteen years?!
I must admit that this "What now?" question, like most questions regarding the stock market, is not easy to answer and involves a fair bit of gut feeling. That said, certainly anyone buying the FTSE 100 at 6,000 today through a cheap index tracker should enjoy greater annualized returns than anyone who bought at 6,000 during April 1998!
And I am pretty sure anyone buying the FTSE 100 at 6,000 now should enjoy a greater income than anyone buying gilts. Indeed, I calculate the dividend yield on the FTSE at about 3.7% at 6,000, while 10-year gilts (U.K. government bonds) currently provide less than 2%.
As I told you here, the yield gap ratio does not look great for bond buyers right now.
Heavyweights
Nonetheless, the value attractions of FTSE 6,000 may be due to a few heavyweight shares. You see, the index's P/E of around 12 is influenced by:
1. Royal Dutch Shell and BP trading on P/E multiples of about eight, although I believe the oil sector's low ratings are caused by heavy capital-expenditure that flatters reported earnings. I talked about Shell's P/E of eight here.
2. Major miners such as Rio Tinto, BHP Billiton and Xstrata trading on multiples of 11 or 12 yet offering subpar dividend payments. I believe the mining sector's low dividends reflect the somewhat cyclical -- and therefore less valuable -- earnings the mining industry generates.
I estimate these oils and miners represent more than 15% of the FTSE 100 and therefore have a sizable bearing on the index's overall valuation.
Meanwhile, defensive stalwarts such as Associated British Foods, SABMiller, Diageo, and Unilever trade at 17 times profits or more -- near the top end of their past ratings and not obviously great entry points for value-conscious investors.
In addition, utilities such as Severn Trent and United Utilities trading at about 16 times profits provides further evidence that valuations for "safe havens" are far from cheap at present.
What I've done
On balance, I think the FTSE 100 offers a reasonable but not spectacular value at 6,000, and I do not see any reason why regular tracker investors should stop their monthly contributions.
But I do feel the index's overall valuation is influenced by certain sectors, and I am concerned about how several dependable names are trading on relatively high P/E ratings. As such, I have recently decided to trim my own FTSE 100 tracker exposure, and I plan to reinvest the proceeds into a few hand-picked shares.
I have not yet decided what to buy, but to help me make my mind up I have downloaded this special free report that names eight large caps held by high-income superstar Neil Woodford.
The report told me Woodford's portfolios are currently brimming with famous dividend-paying names and have outpaced the market by more than 200% during the 15 years to October 2012. What's more, his portfolios don't carry any of the oils, miners, and "defensive havens" mentioned in this article.
If you, like me, are looking for conservative, index-beating opportunities for this year, you can download Woodford's 2013 share ideas for free by clicking here. I am hopeful that I -- and Woodford -- can beat the FTSE 100 during 2013 and beyond with our own share ideas!
Let me finish by adding that if you have any top share picks for 2013, by all means post them in the comments box below. I look forward to your suggestions.
Happy investing!
