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Market commentary April 2010

By April 14, 2010No Comments

SUMMARY. There is no denying that the UK stock market remains in a clear uptrend. Although the UK election creates uncertainty, it is only of passing interest to the stock market, which has bigger concerns in the long run. In the short term a fall to 5000 on the FTSE 100 index should not be a surprise, and would in all probability create a buying opportunity.

The UK stock market is now up 65% since the low in March 2009 (when the FTSE 100 index was 3500, now 5800). Some time ago we cautioned that the market had risen a long way, quite fast, and that momentum indicators were giving early warning signs. Well the market did hesitate early in the New Year, but by March had re-established the optimistic tone – there is no denying that the UK market remains in a clear uptrend, intact despite some stark concerns.

For example, the General Election is just ahead, and creates the uncertainty which markets loathe. Yet the companies which dominate UK stock market generate 70% of their earnings overseas, so domestic politics is of only passing interest.

Other concerns are of far greater significance.

Which country will go bankrupt first? Greece is only the obvious immediate candidate, others will emerge in the years ahead (including a few states in the U.S.), but this story has a long way to run and beyond continental Europe (and Greece in particular) is having little impact on markets (for now).

The economic health of the U.S. prompts very polarised diagnoses, from doomsters to boomsters – we are still midst an extraordinary financial experiment to put the U.S. (and world) economy back on its feet, and it is anybody’s guess how it might resolve. It is pointless getting too bogged down on possible outcomes – our time is better spent staying close to events, and looking for signs of significant changes in trend or sentiment.

Last but not least, China, the strength of their recovery being vital for the revival of global confidence. The Chinese authorities have already begun to take action to slow down their economy, the opposite of the problem in the U.S But this should be welcomed as a slowdown in China now will underpin a stronger long term recovery, and, hopefully, enable them to avoid a more exaggerated boom and bust cycle.

These concerns will ensure we are on our toes for some years, not to mention the even bigger problems caused by ageing populations (see last issue of TopFunds). But otherwise there areno particularly strong indicators that should concern us in the short term, such as valuations (PE ratios) or technical measures warning of over-exuberance. Company profits are improving, though debates rage about whether this is sustainable. It will be fascinating to see how companies spend their growing cash piles: recruit more; increase capital expenditure; increase dividends. More on this another time.

In the short term, don’t be surprised by the FTSE 100 index falling back towards 5000. On our reading of the tea leaves this would be another buying opportunity.

As we mentioned last time, the UK stock market has been showing some strength compared to emerging markets, certainly once you strip out the gain to UK investors due to sterling weakening. Since the New Year, the FTSE 100 index is up 8.7%, whereas emerging markets (excluding currency gains) are up just 3.9%. One of our strongly favoured corporate bond funds (Henderson Sterling Bond) is already up 9.5% (we forecast 10% for the whole year), and two of our less volatile favourites (Newton Global Dynamic Bond and Standard Life Global Absolute Return) are up 7.3% and 4.8% respectively.

Enjoy the continuing positive trend, but where possible mix up your investment choices across non-correlated assets as represented by these funds – in other words don’t buy funds that will inevitably just go up and down together, or you will essentially have all your eggs in one basket.

Dennehy Wealth