SUMMARY. Most stockmarkets have fully recovered, or nearly so, from the not very significant falls earlier in March which generated hysterical media coverage. There are growing signs that the UK economy is slowing, which will have the positive effect of ensuring that we don’t repeat the mania of 1999/2000 any time soon. In this environment equities remain the asset class of choice, and the better fund managers will continue to find money-making opportunities.
Following the shenanigans at the beginning of March, the Shanghai stockmarket is back at a new high, and many global markets have fully recovered. A shame the journalists haven’t given any coverage to this recovery to counter the hysterical reporting earlier in March.
Top of the market? In the UK, sales of ISAs appear to be noticeably lower than last year. This is a fairly reliable indicator of sentiment amongst the investing public. Significant market tops arise in periods of extreme positive sentiment, which is clearly not the case now taking into account the cautious attitude of ISA investors. Moreover, equities still look pretty good value compared to other asset classes, particularly bonds.
Perhaps lack of ISA sales also reflects sentiment more widely, and bigger economic trends. Ernst and Young noted slightly more profit warnings in the last quarter of 2006, and fund managers are noting a similar trend in early 2007. All of a sudden commercial property auctions are not “standing room only”, and consumers seem a bit downbeat after three interest rate increases in the five months to January 2007.
On residential property, the average value of a rented house went up by a huge 10.7% in the three months to the end of February 2007. But if you strip out London and the South East, average values fell by 0.6%.
If the wind is being taken out of the sails of the UK economy that is all to the good, as it ensures that we will not see a repeat of the mania triggered by over-confidence that created the stockmarket bubble of 1999/2000.
Against this already rather dull economic backdrop, there might yet be one or two more UK interest rate increases, even though the evidence that there are still inflationary pressures is mixed, because the Bank of England is likely to err on the side of caution. Ironically the likelihood of interest rate cuts in the US might put back the timing of eventual cuts in the UK. This is because lower interest rates in the US, still the pivotal world economy, will have a stimulating (and inflationary) global impact, and in areas which clearly don’t need such a helping hand e.g. China.
In a mildly inflationary environment, equities remain the asset class of choice, particularly with their undemanding valuations and limited debt. Profit margins in general might come under a bit of pressure, but there are still good companies out there with pricing power, and the better fund managers will identify them. From an investor perspective, any weakness is a buying opportunity.
