BLOG: Which way are equity markets heading?
On the one hand, Richard Buxton of Old Mutual, a very experienced and successful UK equity manager, whom I rate highly, has said he believes we are at the beginning of a long-term bull market. The guys at Neptune are equally bullish.
On the other hand, Stewart Cowley, also of Old Mutual, and another very experienced and successful manager, has been reported as saying that it might be time to take your profits and run. I bet discussions there are quite lively at the moment! Stewart is concerned that now central bank liquidity is coming to an end (if tapering in the US continues at its current pace, quantitative easing is set to end in August), markets could suffer a difficult period as they come off what has become a very addictive drug.
Looking at a 20-year graph of the FTSE 100, it does appear that the UK market is at a crucial juncture. It shows very clearly a ‘triple-top’: the market has reached a peak of 7,000 (or very close to 7,000) on three occasions now – December 1999, June 2007 and today.
After the first two, it fell to around half the value – to a level of around 3,300 in March 2003 and 3,600 in March 2009. But what will it do this time? Will 7,000 prove once again to be a level of strong resistance, followed by a significant market correction? Or will we finally break through the glass ceiling?
Artemis made the point last week that the most recent bull market that began in March 2009 has already seen some sharp corrections. The first was in the spring of 2010. The worst (so far) was the summer of 2012.
The corrections have lasted from 27-154 days. Sell-offs since have been shorter and shallower. All were in response to macro economic matters which threatened to be recessionary. When they proved otherwise, the bulls charged back.
The recent jitters have not been a reaction to renewed economic weakness in Europe or disturbing news about China’s financial stability.
Investors have pretty much ignored events in the Crimea and Ukraine – as they have the emerging markets crisis at the beginning of this year, which turned out to be a great opportunity for value investors to buy cheap EM stocks. So market volatility at the moment isn’t macro-driven, and that, according to Artemis, makes a ‘relief rally’ less likely.
I’m a little more positive than that. No one really knows how it will all play out, but you can do a bit of educated guess work.
The first thing to do is to look at valuations, and UK mid-caps especially are now at a slight premium versus their long-term history. But as JP Morgan’s analyst, Kerry Craig, rightly pointed out to me a few weeks ago, valuations can get very expensive before we see a correction. At the moment they are only slightly above their 15-year average.
In the short term, I believe any sustained market rally needs to be driven by the mega caps. There is little evidence yet that this will happen, apart from a slight pick up in M&A. If we are to finally break the 7,000 barrier, earnings need to come through, and the big companies need to lead the way. Any disappointing earnings will be punished.
Personally, I think that the FTSE will remain in its current trading range between 6,500 and 7,000 for a while longer, but I do think we will break the 7,000 barrier – and stay there – eventually. Not exactly a raging bull market, but going in the right direction!
Darius McDermott is managing director of Chelsea Financial Services