Solving the puzzle of rising markets


It seems nearly every day we get disappointing news about the UK economy. But still, investors don't seem to care. The UK stock market has risen 10% since the start of 2013, and is now higher than it has been since the US housing market bubble burst in 2007.

Yesterday was a case in point: the stock market went up again, on a day that forecasters started to seriously contemplate the possibility of a "triple dip", and the pound fell more than 1% against the dollar.

Some would say this is just another example of financial markets living on another planet from the rest of us. I've chosen to find it comforting - a reminder that the companies in the FTSE 100 only make about 20% of their sales in the UK. So our companies can do well from growth in other parts of the world, even when the domestic economy is flat.

But, as Goldman Sachs points out today in a research note, there's another, simpler side to the story: namely, that fall in the value of the pound. The market might be going up in sterling terms, but if you take a more global perspective, UK shares have not really performed well at all.

Most global investors measure their return in dollars. If you do that, the performance of the UK market since the start of the year ranks 15th out of the 20 largest stock markets, and below all the European markets other than Italy.


As you can see from the bar chart, Japan has managed to perform well, even in dollar terms, despite the yen falling even further this year against the dollar than the pound has.


It's a bit odd that the UK has not managed the same trick. With so many FTSE companies earning more than 80% of their sales abroad, you would think they would be doing at least as well as other markets, in dollar terms, if not rather better.

The Goldman Sachs folks think that might still happen. Looking back, they find it usually takes five to six months for UK markets to start to perform well in dollar terms after a big fall in the currency.

They also point out that the FTSE 100 has been hampered, lately, by the fact that about a quarter of its market value is tied up in the oil and mining sector. The broader FTSE 250 index has been doing better, in dollar terms, for a while.

So the UK's cosmopolitan stock market may yet deliver a healthy return to global investors this year - even if we don't see much in the way of growth here at home.

You might or might not find that comforting; it probably depends on whether you live in one of the roughly two-thirds of households with pension or Isa money invested in UK stocks.

For me, the big puzzle is not the UK stock market's performance, but the continued strength of markets across the Channel. Most European stock markets are more domestically oriented than the FTSE, and the domestic economic news coming out of Europe has been even worse, on balance, than it has been in the UK.

I've talked about this before, I realise. But in stock markets and (especially) the market for government debt, investors seem to be counting on the European Central Bank to make everything come good in the end, whatever happens to the domestic economy in the meantime, and whatever the popular pressure on governments to change course.

It's good news for European policy makers that their plan to save the euro still commands so much market confidence, even as large parts of the continent plunge deeper into recession. But if you're looking for a market puzzle, that is where I would begin.

Stephanie Flanders Article written by Stephanie Flanders Stephanie Flanders Former economics editor

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  • rate this

    Comment number 90.

    87 Aircraft.

    Not better, just people considering a better potential for "real" growth if they feel the bond bubble has burst.

    Who knows. I don't!

  • rate this

    Comment number 89.

    it is true you can have green & ethical investors but until western economies return to normal they will lose money. In the time it has taken me to write this, US public debt has increased by $5 million and yet the Dow Jones is leading the US out of the doldrums.. Someone is having a laugh

  • rate this

    Comment number 88.


    Your comment suggests that there is such a thing as investor altruism springing from the fear of chaos due to hyper-inflation .. there is no such a thing as altruism in an investor - he's out to protect his pile only AND commodities are a much better way to do this - as they say in USA "buy gold and go to sleep".

  • rate this

    Comment number 87.

    You slighlty miss my point. Why is it better for stocks to be rated over bonds?

  • rate this

    Comment number 86.

    Just a though - UK pensions auto enrolment has kicked off for large and mid sized employers.

    Possible that substantial additional income has gone to the market through pension funds owing to this.

  • rate this

    Comment number 85.

    84 Aircraft.

    Index = a measure of something doesn't it? So yes.

  • rate this

    Comment number 84.


    So FTSE and DOW are just measures of the relative security of Stocks v Bonds ?

  • rate this

    Comment number 83.

    Record highs on markets underscore irreconcilable difference between 1. needs of the people & 2. existing economic/political system. There are ample resources to guarantee every worker a job with decent pay + a secure retirement. But fortunes of financial (elites) parasites come first, especially through offshore banking.
    How long can this rotten system persist?

  • rate this

    Comment number 82.

    CBs are financing biggest financial bubble in history using stocks, bonds & other financial assets at inflated prices. Without any REAL bank reforms, CBs, like the Fed, underwrite LUNATIC SPECULATION - like that which triggered the last financial meltdown.
    Conditions ripening for more disastrous crash, but financial elite fear not; they are too big not to bail, too big to jail....

  • rate this

    Comment number 81.

    I was also wondering why reports indicate along with the FTSE that we have returned to the 2008 position when the UK Banks obviously were the worse behaved than the US and World banks sending the £ from $2 in value to $1.37. UK financial markets appear to have brought about the world crisis? At any rate the disturbing drop in Stirling (Never recovered) may well have assisted in company valuations

  • rate this

    Comment number 80.

    #56 and yes that is a ? that does need answering

  • rate this

    Comment number 79.

    The world is awash with liquidity.
    Bonds are awful as they have been rigged by global QE.
    Ergo equity markets rise subject to short term volatility.

  • rate this

    Comment number 78.

    @70 Aircraft.

    They put their money in "safe" stuff i.e. Gilts/Bonds.

    Now the reverse is probably happening.

    But 20 Cent is spot on. Maybe a financial transaction tax IS the answer after all? Shift power from traders to the people.

  • rate this

    Comment number 77.

    "...investors don't seem to care"
    "The UK stock market has risen"

    Because THERE ARE NO INVESTORS, or just a few, the large majority are SPECULATORS.

    You cannot call investor a person / company that buys shares just to sell a few seconds later.

  • rate this

    Comment number 76.

    Shares have become divorced from the companies that issue them. Share trading is just a gambling merry go round of people betting they will go up or down, and hoping they are not holding them when they fall. Anything that rises much faster than inflation WILL crash, be it house prices or shares.

  • rate this

    Comment number 75.

    "Solving the puzzle of rising markets"

    Markets are rigged and the entire system is hooky
    It's as bent as a nine bob note

    The next crash is going to be a stonker

    Repressionomics- can 'financial repression' solve debt crisis?

    "we are paid not to think about the market value", says one fund manager

  • rate this

    Comment number 74.

    It is very simple.

    Market's are rising because the yield of fixed interest bonds is ridiculously (insanely) low.

    The idiots (read the BoE) have destroyed money and until its price is restored this insane situation will continue.

    Mervyn King is not content with causing the crash(via the bubble) he is trying to leave a decade(s?) long legacy of a crushing depression.

  • rate this

    Comment number 73.

    @71 BWilds
    You could be right.

    I, too, have a bad feeling about this, to put it in good ol' Indiana Jones-speak. The problem is that no one at the BoE, Treasury & No11 seem to be asking hard questions like:
    1. If what we are doing ain't working, should we stop or do the opposite? {Am not talking borrow&spend, btw}, &
    2. What other measures might create support for current approach?

  • rate this

    Comment number 72.


    Try the world of eco system modelling - there's increasing evidence that what happens in eco systems before they crash can be over laid onto economies.

    The basic thinking being that if you do not have enough diversity & strength within each level therein the system destablises then collapses...

    ...the economy is too top heavy & not diverse/strong enough at its lower levels...

  • Comment number 71.

    All this user's posts have been removed.Why?


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