One year on
Last week marked the anniversary of the bottoming out of the market in 2009. The FTSE All-share index has risen 53% since last March and it is the third-best performance in a year since the Second World War. It is also twelve months since the Bank of England’s Monetary Policy Committee cut interest rates to 0.5%, where they have remained ever since. It is hard to remember how doom-laden the market was then: we were said to be facing the worst recession in living memory, the banking system was in virtual meltdown and the housing market was set to see an unprecedented wave of repossessions. With hindsight, luckily most of these dire predictions proved to be too pessimistic and although we are not completely out of the woods, there are some grounds for optimism.
For most market observers the burning question of the moment is how much further can we see this rally run? Whether it is a steep bear market rally or a whole new bull market is the subject of much debate and it is usually only when one looks back that a definitive answer to this becomes apparent. There are several negative factors at play at present, which may unsettle the market. Firstly and most obviously the General Election looms, with opinion polls now regularly sending jitters through the market as observers contemplate the uncertainty of a hung parliament. Secondly last week it was announced that the Budget will be on 24 March. Shares often fall near Budget day when taxes have been rising, particularly when the market expects further increases. Sterling has fallen sharply in recent weeks, which should prove a help to export orientated stocks and was a key reason why there was such a sharp rally in February. As the pound stabilises, so the stock market loses a key growth trigger. There has been speculation as to whether the UK is likely to lose its AAA credit rating, plus on-going concerns that lending remains constrained, particularly with regard to mortgages. Indeed the housing market is a subject of concern as evidence emerges that the recovery appears to have been temporary – and highly variable across regions!
Turning to the positive influences, there has been an upsurge in merger and acquisition activity; witness the recent takeover of Cadbury by Kraft and speculation as to the next targets has certainly taken an upward jump. We have had a good results season recently for UK companies, with many revealing results above predictions. The fourth quarter last year showed the UK emerging (finally) from recession, albeit at a very modest pace and the strengthening of the US dollar has helped a considerable number of UK companies who derive a significant proportion of their earnings from North America. The China growth story also rumbles on: February export figures showed a rise of more than 45% year-on-year, which should be taken as encouragement on a global basis.
So, an obvious two-way pull. On balance, it seems likely that in the short term the negative factors may prove to be more persuasive, but it may be wise to treat related market weakness as a buying opportunity for the longer term.
This does not constitute a recommendation to buy or sell investments and the value of any shares may fall as well as rise. Investments carry risk and investors may not receive back the amount invested. The views expressed are those of the author and not necessarily of SWIM.
Disclaimer
By necessity, this briefing can only provide a short overview and it is essential to seek professional advice before applying the contents of this article. No responsibility can be taken for any loss arising from action taken or refrained from on the basis of this publication. Details correct at time of writing.
Cunningham Coates Stockbrokers is a trading name of Smith & Williamson Investment Management Limited. Authorised and regulated by the Financial Services Authority.