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“This bull market has crept up by stealth,” says the FT of the UK’s stockmarket performance. The FTSE 100 index closed two points shy of 5,900 early this week – that’s almost 80% higher than its low in March 2003. It means that we have quietly experienced almost three years of gains in equities without a 10% correction.
We haven’t had three years of performance like this since 1984-1987, and for a rally longer than three years look back to the 1950s, says US investment bank Morgan Stanley. How has this strong performance crept up on us? The FT suggests several reasons.
First, strong earnings: despite the long rally, the FTSE 100 is cheaper now in p/e terms at 12.8 times (on HSBC’s earnings figures) than it was at three years ago when it was 14.4 times. Second, while pharmaceuticals and telecoms have been weak, London’s large oil, gas and mining sectors have been exceptionally strong. Third, the market has seen a good deal of cash- funded mergers and acquisitions activity and share buy backs, rather than new rights issues.
Even after the three years of gains, Tim Bond, in the 2006 Barclays Capital Equity Gilt Study, is still “bullish” on UK stocks, believing they are generally undervalued.
But investors might need to be patient. According to Bond’s study, the equity market operates in 15-year bull and bear cycles. He estimates that it may yet take another ten years of the current 15-year cycle to return to the highs of March 1999, when the FTSE 100 peaked at 6,930. That implies that the current rally may soon be due a correction within the 15-year cycle.
Bond also notes that investors tend to pile into rising markets ahead of a downturn. Timely then that the Association of Investment Trust Companies (AITC) has just published new figures showing active investors “are planning to increase their equity exposure over the next six months”, reports The Sunday Times.
So be wary of following the herd, warns Philip Coggan in the FT. “Do not slant your portfolio towards those markets that have recently done well.” Why? Because although analysts are not predicting any specifics that might trigger a correction, “the risk is that the correction, like the rally, might come by stealth”.
Published in Stock markets
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Annunziata Rees-Mogg
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