The only way is up.. ..the view from the Square Mile
Even compared to some very volatile years in the recent past, the UK stockmarket has already had an extraordinary year in 2009…and we are only three quarters of the way through.
Exactly a 12 months ago, the firestorm of the UK and indeed global banking crisis brought the financial system perilously close to the brink of collapse, necessitating the massive bailout and nationalisation programme. The current year started dismally with the FTSE100 Index plunging below 3500 in March. Fast forward six months and the FTSE is 50% higher with the index at over 5200 supported by a wave of optimism and buying from fund managers.
In the meantime, although the overall economic outlook for the UK may not have deteriorated since the gloomiest days in the Spring, it is certainly the case that things are not significantly better. Gordon Brown might be optimistically talking about a return to growth in 2010 – which just happens to be an election year – but many economic indicators are still looking very grim. Unemployment is at a 14 year high and is still growing, the consumer remains over-indebted, confidence is still weak and the wave of tax increases to pay for the massive explosion in public debt is yet to be felt.
So given all this, why is the stock market 50% higher than it was six months ago? Can fund managers see something that we “mere mortals” can’t? Or is this optimism simply misplaced and representing a classic “suckers rally”?
The short and most honest answer is probably “who knows?” and that certainly includes most fund managers! Certainly very few managers could claim to having foreseen the strength of the stockmarket over the past six months. Momentum has clearly been behind the stockmarket “bulls” and the performance of those fund managers who have invested into that momentum (and many fund managers despite claims to the contrary are often momentum buyers) will have been spectacular. Moreover if they have been heavily invested in many of the stocks that cratered in performance in 2008 and the first part of 2009, then their performance will have been stellar with, for example, some bank shares up 600% from their lows.
However, not all fund managers share the current optimistic mood that has underpinned the extraordinary bounce in the stockmarket and perhaps most worryingly several of these “Jeremiahs” are managers who have impeccable track records of long-term performance.
For instance, Neil Woodford of Invesco Perpetual who is arguably one of the UK’s most respected fund managers has seen his flagship income fund only just break into positive territory this year and significantly underperforming a strong stock market.
Woodford, who famously avoided all banks and financial shares, still believes that economic recovery is “a hell of a long way away”. Not only does he believe that the banking crisis is far from over and that full nationalisation still remains a possibility, but in contrast to the optimistic noises emanating from the housing market, he still believes that UK house prices will fall by a further 20%. Nor is he alone: Crispin Odey, the founder of Odey Asset Management, who has a similar record of being right in the long, if not always in the short-term, was quoted as saying that although the current stockmarket rally represented a “rational bubble” in an era of cheap money, but that it did not signify economic recovery and that a further “serious crisis” is likely to occur “a few years down the line”.
At the moment, the bulls appear to have won the debate as evidenced by the market’s relative resilience and the FTSE Index holding steady above 5000. However, it is also clear that a lot of good news is priced in to this market and whilst financial Armageddon may have been successfully averted last October, the newsflow from companies in the “real economy” will be studied in the coming months for firm evidence of real and sustained economic recovery.
Without it, the market could look quite vulnerable and fund managers looking to lock in their hefty gains before the year end could spark a stampede in the opposite direction to the one of the past six months. In which case, the bears might still be proved right after all.
