Sizzle Or Fizzle, It Doesn?t Really Matter


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So far this year stockmarkets have followed the seasons. Winter was gloomy, with darkest days in early March. As we moved through spring the sun began to break through the clouds, with stockmark

So far this year stockmarkets have followed the seasons. Winter was gloomy, with darkest days in early March. As we moved through spring the sun began to break through the clouds, with stockmarkets posting very encouraging results in March and April. They dipped a little in June but as we went through July markets began to sizzle and soar higher.

Global equities hit their highest levels in years. The FTSE 100 index rose 8.45% over July and another 2.7% in the first week of August. It was a similar story across the Atlantic with the Dow Jones rising 8.58% in July and 2.16 between 1st and 7th August.

July?s was the best monthly performance for the FTSE 100 since the fall of Baghdad in April 2003. It was almost the best month in 17 years, but the rally was temporarily halted at the end of the month as investors took profits. The winning streak had lasted 11 days (matching the record set in December 2003) and added 11% to the index.

Share prices were boosted by stronger manufacturing data in the UK, US, Eurozone and China, increasing confidence in the economic recovery, better than expected corporate earnings and a growing belief that the banking sector has become more stable and that lending is improving.

Banks appear to be starting to put the credit crisis behind them. The first half of the year reports from Barclays, HSBC and Lloyds Banking Group boosted financial stocks. Stephen Green, the HSBC chairman, said: ?It may be that we have passed, or are about to pass, the bottom of the cycle in the financial markets.?

Share prices dipped when the Royal Bank of Scotland reported a net ?1 billion loss for the first half of the year, but had recovered by the end of the day. This seems to be the pattern for bad news at the moment ? the market also recovered from the Bank of England?s pessimistic comments that the recession was ?deeper than previously thought? – though a major shock could still have a more damaging effect.

Emerging markets have also performed well this summer, as investors? risk appetite grows. There is a returning belief in ?decoupling? ? i.e. that developing countries are becoming less dependent on the developed world since they can now rely on stronger domestic demand and not so much on exports. Asia and Latin America did not have the same fundamental problems in the banking sector as the Western world so lending and credit growth has quickly resumed, helping drive growth.

Commodity prices also rose sharply in July, hitting their highest level for the year, buoyed by positive economic data and a low US Dollar. Nouriel Roubini, the influential New York University economist, said that ?as the global economy moves towards growth as opposed to recession, you are going to see further increases in commodity prices, especially next year.?

The top performing UK equity managers expect the FTSE 100 to extend its recovery through 5,000 by the end of the year, even though periods of gloom are likely along the way.

Stockmarket historian David Schwartz believes that ?the market has a lot further to go?. He predicts the FTSE will finish 2009 at the 5,300 mark.

While some commentators have cautioned that after a 33% rise (since the market lows in March) this is the time to sell, the indications still point to this being the time to buy – shares remain undervalued, banks are only just getting their footing back and house prices are only just beginning to show signs of stabilisation.

What matters is not how much markets have gone up or down, but whether valuations are still attractive. Today?s valuations may not be as attractive as they were in March, but they are still much more so than before the financial crisis started two years ago. There is a long way to go before share prices fully recover, and therefore more potential for investment growth, whether you already own shares or are buying them now.

There is still a considerable amount of money sitting in the sidelines that missed the first part of the rally and could be committed once conditions improve, helping propel shares upwards.

There is no denying that over the short term uncertainty remains ? the mixed messages we are getting re the UK economy do not help. And in most markets a consolidation or short-term decline is normal. Investors are still cautious and preferring to take profits, which temporarily affects prices. But this also means there are still plenty of others waiting to commit their cash.

The debate about whether to buy or sell at this point is an issue for short-term traders rather than long-term investors. If you are invested for the long term, the outlook is more positive as in time we will move past the current economic uncertainty.

Even in bull markets share prices do not move upwards in a straight line ? they will fluctuate up and down – but historically the first 12 months following a bear market yield very attractive returns. Those who stay invested and focused on their long-term goals enjoy the gains; those who sit in the sidelines miss out.

First and foremost, though, your allocation to equities should be based on your investment objectives. If you already have an investment strategy in place you should probably stick to your long-term asset allocation, rather than moving more capital into equities in the hope of short-term gains. If your portfolio has drifted off course, for example, if you moved a lot of capital into cash and your portfolio does not now offer the protection from inflation you need, then this could be a good time to start buying shares again provided you still have a long-term time horizon.

If you do not yet have an investment strategy based on your goals, before you start buying equities you should speak to an experienced financial adviser like Blevins Franks to establish what asset allocation will suit your needs and how best to achieve it.

By Bill Blevins, Managing Director, Blevins Franks

10th August 2009

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