Nov 6 2006
The old adage of New York traders is "Buy in December, sell in January". In recent years November and December have generally seen growth in the UK markets, but some question marks have risen over the fate of this year.
In the last 16 years, the FTSE 100 has risen 13 times in December and 12 times in November. However, this year the prospect of an interest rate rise this November could scuppers any rises. Furthermore a general business slowdown could see the markets lose their traditional festive cheer and activity.
Andrew Milligan, head of global strategy at Standard Life Investments [Report], explained at the end of the second quarter that SLI was "trimming its exposure to risk".
He went on to say: "Investors have become confident and perhaps in a few cases a little overly confident about the outlook of the world economy."
Good profits have come from some countries, but margins have been squeezed from others, and in riskier markets, like emerging markets or more mainstream equity markets, a lot of better performance has already been priced in, Mr Milligan explained.
In particular the US economy has been slow after the Federal Reserve's campaign of inflation-tightening interest rate rises. In Europe and the Middle East growth is expected, although the UK is predicted to be "sluggish".
In the Standard Life Global Overview report [Report], Mr Milligan sees a moderate slowdown in the US economy ? bottoming out in spring 2007. However, he feels the global economy will resist this and stay buoyant. Under lying investment fundamentals are expected to remain positive, but emerging equity markets will see some volatility.
Invesco Perpetual [Report] predicts the UK equity market picking up from the mid-month low on 25th September to record positive returns in all FTSE indices for the third quarter as a whole. It is uncertain whether this growth will continue into the fourth quarter.
The report found over the third quarter, Asia performed well, and, with the exception of Thailand that faced a coup, positive returns came in all countries, helped along by oil prices. Slowing US growth is starting to translate into reduced corporate profits.
John Greenwood, chief economist at Invesco Perpetual highlights uncertainties in the Fourth Quarter Economic Outlook [Report]
He explains that splits between economists stem from differing views for the prospects for the US economy and the knock-on effect it could have on US consumer spending and US imports.
He says: "Naturally this divergence of views spills over into differing views on the outlook for equities, bonds and currencies, and therefore the appropriate asset classes to hold in portfolios."
Future strong growth is also in doubt as central banks around the world raise interest rates.
Mr Greenwood concluded: "My view has been that from here onwards the global recovery will probably be more subdued in terms of real GDP growth and corporate earnings growth, but because economies will be operating nearer to full capacity limits, the risks of inflation will be potentially greater."
His prediction was for lower growth with higher risks of inflation placing a ceiling on the performance of equity markets, and to limit the returns in bond markets compared with earlier phases of the upswing.
"Nevertheless, as central banks have become more skilled at managing monetary policy and controlling inflation expectations, there is a high probability that the current business cycle expansion will continue for several more years," he added.
Percival Stanion, head of asset allocation at Barings [Report], foresees gentle deceleration in activity in the US economy. In Europe and the UK central banks are not expected to "aggressively tighten" monetary policy ? as rates are expected to rise but then hold.
Looking to Christmas, Mr Stanion expects a seasonal effect to support bonds into the end of the year, but a slow rise in yields in the coming year.
At Scottish Widows Investment Partnership[Report], Sebastian Mackay, from the global bonds and economics team, points out most recent global activity indicators have weakened over the last few months. Looking beyond 2006, he sees hard landing for the global economy if central banks focus on inflation and ignore slowing economic activity.
In the UK, profit margins and non-energy costs are expected to remain muted in an environment of weaker demand growth, against Bank of England assumptions for some recovery in profits.
The AXA Framlington outlook is equally cautious looking to the end of the year [Report]. They states: "To some extent, markets are priced for perfection.
"A modest slowdown would reduce inflationary pressures and allow global interest rates to peak at a historically low level. A soft landing would not damage corporate profits too much and expectations of lower interest rates going forward raise the current valuation of these expected profit flows."
It also sees bond markets and equity markets vulnerable to any unexpected data.
In his monthly global view, investment director Edmund Brandt at JPMorgan Asset Manager [Report], sees the key to any end of year rally coming from growth figures, with investors being risk averse in the coming months.
He stated: "Given the conflicting signals, we do not expect a rapid rebound in investors' appetite for risk. Rather, we expect investors to maintain a wait and see attitude until a clearer macroeconomic trend emerges."
He added: "Earnings results for the second quarter were generally good in America, Japan, Europe and the UK. But, cautious forecasts for both the second half of 2006 and 2007 from company managements have increased the atmosphere of uncertainty and reinforced the urge to sit on the sidelines of markets and await events."
The overarching view for the end of 2006 is one of caution. Few seem to be expecting a great seasonal leap, but few are also ready to rule it out. Most fund mangers are now looking beyond Christmas and into 2007, which looks like offering a gentle slowdown before bounding back.
