Bill Jamieson: Getting the momentum investing balance right

Not all that long ago, the conventional wisdom in markets was to be cautious of the crowd and to be wary of investing when everyone else was buying.

'How much further can investor enthusiasm run with tech stocks such as Amazon?' asks Bill Jamieson. Picture: Alex Hewitt

But a new wisdom has arisen: stay invested while the market keeps rising. It goes by the name of momentum investing – a strategy that seeks to take advantage of the continuance of existing trends in the market. The basic idea is that, once a trend is established, it is more likely to continue in that direction than to move against the trend. Who dares bet against the crowd?

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Whatever the current pundit rationale, the upward trend of equity markets over the past year has been stunning and suggests momentum investing is truly at work, sweeping all before it.

Last June, the FTSE 100 was trading below 6,000. On Friday, almost a year later, it hit a 52-week high of 7,435.39, a gain of 25.5 per cent over that time. Nor is this surge confined to the stock market behemoths. The FTSE All Share Index has climbed 29.6 per cent to a 12-month high.

These are massive gains over a year by any measure – and achieved in the face of Brexit apprehensions, elections in the US and Europe, worries over a China slowdown and warnings from the Bank of England among many others of higher interest rates and an economic slowdown ahead. But whoever got ahead by being fearful? That seems to be the conviction of UK investors who have overcome these anxieties and have been charging into the market in huge numbers.

Investors piled back into the stock market in March with net retail sales of investment funds jumping to a record £4 billion. According to the Investment Association, shares have proved more popular than more defensive asset classes such as bonds, with net retail sales of equity funds of £1.7bn.

Analysis of Morningstar data by Numis Securities’ analyst Ewan Lovett-Turner showed leading tracker fund providers Vanguard and BlackRock had “significant net inflows in March” alongside Threadneedle UK and Lindsell Train UK Equity funds. Chris Cummings, chief executive of the Investment Association, said: “We are now starting to see some signs of investor confidence returning following a period of reduced risk appetite in the context of geopolitical and economic uncertainty throughout 2016.”

Jason Hollands, managing director of the wealth manger Tilney Group, said the inflows marked an end to the “prolonged period of outflows from UK equities over the last year as investors have favoured more cautious asset classes such as absolute return funds and overseas markets.”

As for the economy, 12 months on from the EU referendum and “investors can see it survived a short-lived wobble”.

Arguably the cherry on this cake for some was news that the closely followed fund manager guru Neil Woodford has bought back into the UK banking sector, having famously shunned it through the financial crisis and its aftermath. He has been snapping up £207m of shares in Lloyds.

The prospect of a convincing Conservative election win next month has certainly helped sentiment. At the same time, the economy continues to grow – albeit lower than previously, but still performing better than many Brexit critics had feared.

And behind all this is an unspoken confidence that the ghosts of the 2007-09 financial crisis have largely been laid to rest, buttressed by signs that global growth is gathering pace.

But are we as fully recovered from that crisis as we like to believe? Almost ten years on from the onset of that crisis, Ian Spreadbury, portfolio manager at Fidelity, reminds us that “nominal growth has continued to trend down to the lowest level since the 1930s – all despite trillions of QE and a continuation of super-low interest rates… The structural factors which led to the credit crunch have intensified: in particular, high global debt to GDP, population ageing and wealth inequality”.

And then there are questions piling up on how much more momentum can be sustained in markets in the face of central bank interest rate tightening and the reversal of quantitative easing. How much further can investor enthusiasm run with tech stocks such as Alphabet, Microsoft and Amazon already at huge peaks and Apple with its phenomenal $800bn valuation?

The easy bit of momentum investing is following the trend. The problem is when the trend starts to falter: investors can’t unload quickly enough.