Despite the impression created by the media, equities were barely touched in 2007 by the credit crunch. Yet there remains considerable uncertainty, and with the FTSE 100 index in the same place it was 10 years ago, we consider the outlook for 2008.
At the beginning of 2007 we thought “all asset classes are expensive.except for equities”. A number of those other asset classes have taken a hit, but, despite all the fuss, the UK stockmarket was up (5.3%) and still looks decent value.
The Asian and emerging market stockmarkets have been the undoubted stars, with funds in these areas commonly up 30-40% in 2007, and barely touched by the “credit crunch” which hit from Summer 2007, and which we have covered in earlier monthly notes.
What about 2008? There is undoubtedly considerable uncertainty. A marked economic slowdown is already underway in the US, with falling house prices at the centre of the storm, creating a ripple of falling confidence. The additional problem is that the mortgages of doubtful provenance, which encouraged the house price boom, were packaged up and sold to over-enthusiastic (to put it kindly) banks, who discovered from the Summer of 2007 that these bundles of mortgages had been hugely overvalued.
As UK-based advisers, where most clients tend to have the greatest emphasis on the UK stockmarket, we are concerned about when the crowd of investors might embrace the UK stockmarket with more enthusiasm. After all, since the bottom of the stockmarket indices in 2003, and earlier, institutions have been net sellers, and private investors have shown little enthusiasm. In the wake of a sharp bear market 2000-2003 this cautious behaviour was perfectly understandable.
But when can we expect persistently more buyers than sellers, because that is all we need for the market to make sustainable progress? Will it be when markets are much lower, and self evidently historically over-sold? Or are we now at the point where the value in the FTSE 100 index, dominated by global brands, bombed out banks, and sickly pharmaceuticals, is already compelling for global investors?
A catalyst for the latter scenario could be somewhat greater volumes of cash finding their way to the UK, particularly from the very flush Asian and emerging market economies. For those of a certain age this might sound like the “Japanese wall of money” argument which was used to justify the latter stages of the 1980’s stockmarket bubble. But this time there is no bubble, as least not in the UK stockmarket.
There is no problem identifying the sources of these funds. You may have seen reference to “sovereign wealth funds”, and these are the vast sums that Asian and emerging market governments have amassed in recent years, desperately looking for a profitable home beyond their own shores. These funds are already bailing out the biggest US banks e.g. Citibank, the worlds biggest bank.
The footsie stocks, many familiar global brands on decent valuations, are an obvious target. This is perhaps reflected in the recent announcement from China that the Government is going to allow some of their amassed sums to be invested via the London stockmarket.
To create some perspective, the FTSE 100 index hit a low of roughly 3300 in 2003, and a recent high in August 2007 of 6700. The all-time high is 6900, achieved in December 1999. As we write the index is hovering around 6000, a level first hit in March 1998, nearly 10 years ago – so it cannot be said that the UK market has runaway in bubble fashion, far from it.
We are inclined to be optimistic and continue to believe that there is a strong possibility that the footsie can hit an all-time high in 2008. Any such high will not be achieved in a straight line, on the contrary, we seem more likely to hit 5800 first, with support below that at 5500. We feel that such lower levels will be held but briefly, as global money floods into London, and interest rates fall sharply.
Yet this is just short term punditry. At times of heightened uncertainty it is best to focus on the long term positive trends, and remember that stockmarkets are the key long term choice for investors that are comfortable with shorter term volatility, with other asset classes added around the edge as stabilisers. More on that in the next edition of the TopFunds Guide, due in the next 2-3 weeks. We will email you nearer the time so that you can order your copy.