Nov 6 2007
Will the FTSE rally to breach 7,000 in the coming months? Or has recent volatility both at home and abroad stymied any hopes of future record highs in the current climate? Such questions have been bandied about in the past weeks, with investors vying to cash in on temporary lows and avoid weaker stocks. With the markets having suffered in the late days of October and mixed news from the US causing jitters throughout the FTSE indices, leading to a close on Friday of 6530.6, many fund managers nonetheless remain quietly confident that gains are still there to be made.
The M&G Strategic Corporate Bond Fund - Monthly Fund Review states that in recent weeks the liquidity squeeze in credit markets has eased following injections of cash from a number of central banks into the markets. However, the monthly fund review of the M&G UK Select Fund continues to identify the sub-prime market difficulties in the US as a root cause for declining bank stocks in September. As a result, it disposed of interests in Bradford & Bingley and reinvested the capital in HBOS. The fund manager explains that the change was undertaken in order to move away from the risks associated with Bradford & Bingley's focus on the buy-to-let market to HBOS's more even spread of mortgages and insurance and the stability afforded by overseas assets.
In contrast, Tom Elliot's Latest Monthly Investment Outlook for JP Morgan Weekly Stock Market Report asserts confidence in the domestic market. Reviewing recent weeks, Mr Elliot states that the sale of bluechip stocks by fund managers looking to make redemptions had impacted on the All Share Index through July and August, resulting in a fall of 1.8 per cent in sterling terms. However, the market recovered in a late September rally. While the credit crunch impacted on a variety of stocks - and especially Northern Rock - CPI inflation fell below the target rate of two per cent and economic data maintained a robust performance with second quarter GDP growth coming in at 3.3 per cent. In short, Mr Elliot believes that the UK's economy is beginning to slow, but that it is doing so from a position of strength. "We anticipate GDP growth this year of around 2.9 per cent, which should support domestic-focused stocks, while reasonable global demand will fuel export growth," he asserts.
The bank run at Northern Rock has inevitably been a focus of much attention elsewhere. Sarah Arkle, chief investment officer at Threadneedle and commentator for Threadneedle Investment Strategy's October report, states that the run and the ensuing fallout has undermined the Bank of England's credibility and impacted heavily on both consumer and investor confidence. She asserts that the potential for an interest rate cut before the year is out is heightening. However, in terms of equities Ms Arkle is also upbeat, remarking: "UK companies are financially strong with healthy balance sheets and good cashflows," aiding the market's recovery in the face of reduced earnings forecasts. Elsewhere, the Threadneedle Bull and Bear report proclaims that "corporate balance sheers have never been in better shape". While earnings growth may slow and consumption is predicted to fall back next year, the market for equities is nonetheless "attractively valued" and should ride out short-term volatility.
Some commentators have suggested that recent upset both at home and abroad has to some degree proved positive for lead index institutions as investors shy away from riskier possibilities. For instance, the Invesco Perpetual Monthly Market Roundup Overview observes that investors have been behaving cautiously in recent weeks in response to market instabilities, which has played in the favour of bluechip companies - the FTSE 100 rising as a rule while the FTSE 250 and FTSE SmallCap have performed less favourably.
Meanwhile, the manager of the Standard Life Investments UK Equity High Income Fund, Karen Robertson, states that in spite of market volatility in recent months, the fundamentals at home remain relatively positive. An easing in inflationary concerns and "solid" economic growth in the UK, coupled with a strong reporting season, suggest that continued confidence over the next 12 months would not be misplaced, with share buybacks and strong dividend growth expected to persist. The fund has enjoyed continued strong performance in the last year as a result of heavy positioning in the mining sector with interests in the likes of Xstrata and Anglo-American, as well as heavy positions in companies subject to takeover such as Hanson. However, over-weighting in banks such as RBS and Barclays and in property stocks has impacted negatively on fund performance.
Similarly, also in advance of recent trouble for mining stocks, Standard Life Investments Quarterly Global Outlook's, head of UK Equities, David Cumming, states that mining and industrial stocks have led the field in recent months ahead of consumer-focused sectors - partially due to their links with global economies including Asia and Latin America. The resulting independence from the US economy has allowed such stocks to ride out recent volatility in share prices. However, in spite of strong recent gains he believes that more profits are still to be made in these sectors. "Our heavy positions in mining and industrials are balanced by light weightings in consumer goods, services and property. We have been mindful that the domestic UK economy is exposed to a slowdown in consumer activity following the earlier tightening of monetary policy and the recent problems in the credit markets," Mr Cumming asserts.
Erlend Lochen, joint fund manager of the Standard Life Investments Higher Income Fund, states that those firms in which they have invested have enjoyed strong fundamentals including low default rates and high company profitability, with all publishing reports in line with or exceeding expectations. Furthermore, demand for the asset class is much higher than supply at present. However, credit spreads are tight and exposed to volatility in the equity market. Nonetheless, should such volatility arise Mr Lochen asserts that combined with strong fundamentals, buying opportunities could present themselves. Overall, the fund is defensively placed while credit spread remains tight, with potential to move into the high-yield market when it reprices.
The November house view of the Standard Life Investments Higher Income Fund reaffirms that, in terms of equities, companies are controlling costs resulting in positive earnings and growth in dividends, with strong cashflow providing support. However, oil and resources firms are vulnerable to a slip in commodity prices and the housing market remains subject to concerns over bad credit, potentially impacting on homebuilders. Overall, the fund believes that "the market is supported by a mix of favourable valuations and strong cash flows", prompting it to recommend staying very heavy in the sector. In contrast, the firm advises staying light in property given slowing consumer spending depressing the chances of good returns.
Positivity regarding future gains is not shared by all, however. In the SWIP UK Advantage Fund Interview with Peter Cockburn, the commentator observes that "things will get more difficult", with a swing towards downgrades in earnings ratios. "As a market we think it's going to be more challenging than we've seen in the last three to four years," Mr Cockburn adds.
Finally, in Threadneedle Leigh Harrison's weekly blog, Mr Harrison issued a warning against paying undue heed to current wobbles in the market. "After all the to-ing and fro-ing, reading about the dire state of the markets, to come back and find that little has changed really sums it up. Economies don't change that quickly and markets change as fast as the mood of the crowd," he states.
So, while the Financial Times may report that equities may have fallen once again in London opening trading this morning, Monday November 5th - with miners, banks and retailers all bearing the brunt of credit market shocks - many fund managers remain stoic, focusing on the gains to be made from market slips over and above suggestions of further slides.
