Why the FTSE rally worries the City

A correction may be coming but it’s a painful wait for the money men

HOW embarrassing this FTSE 100 rally is proving for the great and the good in the City. While we should all be celebrating the fact that the UK blue chip index is trading just over 300 points away from its all-time high, it seems to have caught the smart set a tad off guard.

At the time of writing, the FTSE was around 1,400 points above its 52 week low of 5,229, and for most of the last year the doom-mongers have been talking of an apocalyptic correction to come. That correction may well be on the cards and the “sell in May” brigade may have their day, but we haven’t seen a sniff of a sustained downtick just yet and that is getting a lot of people very worried.

One seasoned chief investment officer gave me a shrug of the shoulders, a deep exhalation, and a lost look into the distance when he explained to me the problem last week: “we just can’t get into the market. Every time we think we are seeing a correction, it just gets bid into aggressively. We have a lot of frustrated institutional clients who can’t understand why we haven’t got them in.”

But a lot of people have made a lot of money from this massive move upwards in equities. Every share is owned by someone. So why the bleak City mood? Simple really. It’s because the least lucrative strategy for the investment banks and stockbrokers is “buy and hold” and it’s the “buy and hold” investors that have made most of the money so far since those 2012 lows.

As I’m sure you are aware, CNBC anchors are not allowed to trade stocks so my bit of equity market titillation comes in the form of my pension, which is plain old long equities. All the usual blue chip names in the UK are in it, plus a few US, Japanese and European equities. Seriously, if you wrote down 20 well-known, big stocks, that would pretty much be my stock market exposure. It’s boring, dull, so passive it’s unbelievable and, oh yes, making absolutely shed loads of money.

I’m not bragging, I’m just making a point. My portfolio has no downside hedge, it has absolutely no stock picking preferences from me, and in a falling equity market will lose performance very rapidly. But for the moment it is performing like a dream and beating most hedge fund, quant, derivative and a whole host of other diversified strategies.

This boring old long only holding, which millions of other investors are adopting, has to be hurting the smart asset managers – the managers who want churn, who want volatility, who want stagnation, who want more fear in the market. Why pay “two and twenty” when vanilla is top trump? This is certainly not a market rally in which the professionals have covered themselves in glory.

That said, when we have our eventual correction, long only will take a bath. But the timing of that downtick is proving somewhat tricky to call. And it’s proving a painful wait so far for the sophisticated money men, desperate to show how smart they really are.

Steve Sedgwick is an anchor for CNBC Europe.