|Reasons to be cheerful? Despite the London attacks the FTSE 100 index has held steady, buoyed by some decent corporate results in the last few days and hints at M&A activity. Even so footsie has underperformed other world markets since 7thJuly, and the major concerns are growing signs of domestic economic weakness.
Retail sales remain dire, the unemployment trend is edging up for the last few months (albeit from low levels), house prices are officially stagnating (though local anecdotal evidence suggests significant falls), and house repossessions are up very sharply. Fiddling by the Chancellor (his “golden rule” is losing its lustre) certainly hasn’t helped the perception of investors, particularly overseas institutions, who have also suffered from weaker sterling.
Meantime in the US, the economy which drives the outlook for the globe, the US consumer is showing no signs of losing enthusiasm, and this has certainly helped other world stockmarkets bounce.
But the stockmarket isn’t the be all and end all for UK investors. As well as equities being up, gilts are up, commodities are up, corporate bond spreads are again tighter, and commercial property is still performing strongly. The concerns in the Spring, particularly over a global economic slowdown, have dissipated. All markets appear to be rallying in tandem, which is puzzling many observers. For example, why are sharply higher oil prices not weighing down bonds with inflationary concerns?
The answer to the puzzle is liquidity. Recent data has shown that the UK financial sector is awash with money. Money held by UK institutions, mainly life companies and pension funds, increased by 4% (or £11.7bn) in May alone, and this money has to find a home, and at a time when these institutions already had large sums of uninvested cash, so it inevitably finds its way into assets that either already look expensive in absolute terms (bonds) or where economic trends suggest caution would be appropriate (equities and property). The prospect of even cheaper money by way of lower UK interest rates can only fuel more financial asset price inflation. Ride these positive trends by all means, but do not overdo it, and stay disciplined.