Surviving a shaky recovery
Author: Cathy Dixon
The last few months have been traumatic for the stock market. Here investors have had to contend with the General Election and the reality of a hung parliament resulting in a coalition government, which, although part of everyday life for many European countries, is a distant memory for the UK. We have also seen “the Greek tragedy” unfold in the EU, which has led to fears of contagion and the realisation of just how intertwined the fortunes of the European countries are. While a lot of navel gazing emerged from this, co-ordinated solutions appear to be thin on the ground, which has done little to engender confidence.
On the other side of “the pond” the US is approaching mid-term elections, which has led to much sabre rattling, in particular with relation to the environmentally disastrous explosion of an oil rig in the Mexican Gulf. The situation has been on-going for the past three months and involved the President wading in to try and curry favour at home, with BP being portrayed as incompetent at best and criminally negligent at worst.
The impact of these negative factors led to a fairly sharp reversal of fortunes for the market. Having reached a floor in March 2009, the almost unbroken rise in the stock market was rudely interrupted in April, since when we have seen the FTSE 100 index turn down once more, at one stage falling over 1000 points to about 4800, a decline of more than 17%. We have also seen the pound hit a 19-month high against the euro and gold continuing to reach new peaks. This summer we appear to be going from one extreme to another – while previously confidence was riding high, we have seen an air of pessimism sweep across the market and talk of a double dip re-emerge.
The asset class where all the problems began is once again looking shaky. We are seeing house prices fall in the US, with levels of foreclosures stubbornly high and new home sales have slumped to their lowest level since the 1960s. There still remains an obstinate optimism in some areas of the UK that housing will continue to recover and swiftly regain the levels of the peak of the market in 2008, but there are already ominous signs that seem likely to contradict this, let alone the severe spending cuts that we have been told to expect. We will have to wait until October for details of many of the cuts in public sector expenditure to become apparent, although we are likely to be mired in speculation in the months leading up to that time.
Where investors should go from here is therefore something of a quandary. If, as the Chancellor claims, the inflationary threat is deferred, possibly for several years, interest rates are unlikely to rise in the short term. The search for yield is therefore uppermost in many investors’ minds and has inspired the proliferation of corporate bond funds in recent times. However, there is no guarantee that the supply of these will stay at these levels: the UK corporate sector is in reasonable health and therefore likely to be in less need of funds. There are many blue-chip companies which have yields that compare very favourably in this context. It is therefore worth considering increasing exposure to equities, particularly with an eye on total return and spending time on stock selection to achieve this aim.
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 Smith & Williamson Investment Management.
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.
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