"Enjoy the Ride"

As we move into the fourth quarter, Global Stock Markets continue to rise.  This may surprise some of you but if you are sitting with most of your money in cash you should be concerned as they could go a lot higher before any major correction occurs.  Furthermore, returns on cash will remain low for a significant time ahead.

 

There are a number of reasons why I am optimistic in the short term.

 

Firstly, there are two schools of thought.  The Bulls think the worst is over and that the economy is improving with the tremendous financial stimulus gradually having its desired effect.  On the other hand, the Bears think this is a 'Dead Cat Bounce' and the economy is going to fall back into recession giving us the 'Double Dip'.  Well, if this is the case, all I can say is that the Cat must have fallen onto a trampoline!

 

History is on the side of the Bulls.  Over the last century there have been four periods where Stock Markets have fallen by similar amounts and then had significantly short term rallies.  In each of these cases the Markets continued to rally for at least a further 12 months.

 

Secondly, there is a vast amount of cash still available for investment.  Fund Managers in general are still sitting on above average levels of cash and retail investors have hardly started to move back into Stocks after last year's panic.

 

Many people invested last October into one or two year Bonds offering interest rates of up to 7%.  These are now maturing and current rates are much lower.  Interestingly, investors in our TB Wise Active Growth Fund have earned over 11% since the end of September 2008.

 

As deposit rates look set to stay low for years to come, expect money to flow into other assets that can generate a higher level of return, especially income.  I find it amazing that the least favoured sector for mutual fund investors last month, according to the data provided by the IMA, is the Equity Income Sector.  Two years ago this was the most popular Sector containing such Funds as Neil Woodford's popular Invesco Perpetual Income and High Income Funds.  Whilst these two Funds are no longer in this Sector, due to technical changes, there are still a lot of very well known Funds with holdings in high yielding Equities and I would have thought these would have been at the top of the retail investors' shopping lists.

 

There are bargains to be had, such as the Newton Higher Income Fund which quotes a net yield of 6.91% to a basic rate tax payer.  The Manager is even forecasting to increase the yield by 3% over the next 12 months.

 

This is not just a UK phenomenon.  Investors Worldwide have lots of cash and I expect a gradual move back into Equities as confidence returns.  We are also able to access Overseas Markets through Funds such as the Newton Asian Income and Newton Global Higher Income.

 

Thirdly, we are in the US results season and a vast majority of companies are beating forecast earnings.  This is partly due to things not being as bad as expected and also due to tremendous cost cutting.  It appears that companies have reacted much quicker this time to the changing environment, as can be witnessed by the rapid rise in unemployment.  Top of the ladder this time around seems to be the Technology companies which have performed poorly over the last 10 years.  Apple, for instance, came out with earnings this week that beat analysts' estimates by 28%.  However, there have been good results across a broad range of companies, starting with Alcoa (Aluminium) the first to announce its results,  through to surprisingly strong results from Banks (JP Morgan and Goldman Sachs).  Other companies to beat expectation by a wide margin include Caterpillar (Farm and Construction Machinery) Pfizer (Pharmaceuticals), BlackRock (Fund Management) and Lockheed Martin (Defence).  To date, 79% of companies who have reported their figures have beaten Broker estimates.

 

Due to demands of work I started this article over a week ago but the trend has continued.  Most noticeably has been the pattern of the Market rising to a series of new highs.  There have been a number of very strong days in which the UK Market has rallied by up to 2%, these tend to be followed by a day or two of modest declines which is then followed by another strong upward rally.  This is a very strong sign that there is still good upside momentum.  Investors are using any setback as a chance to buy.

 

If I am right and the Market does eventually rotate into the higher yielding Stocks, this should add even greater momentum to the FTSE 100 as this is the Index that is dominated by companies such as BP, Royal Dutch Shell, Vodafone, Glaxo, BAT and Astra Zeneca.  In the short term I expect the Market to rally to 5400 and then on to 5900.  We may all be surprised by how quickly these levels are reached.

 

David Stephenson

 

This blog contains the personal views of David Stephenson as at October 20^th, 2009, and does not constitute financial advice.