Comment: Surveying the foothills of a secular bull market
SO HERE we are, with the FTSE-100 at 6,489.6 and shares just a whisker below their all-time highs. But seldom has a market rally proceeded against such a blizzard of investor doubts about its basis and durability.
Many will be tempted to snatch profits while they can, scarcely believing their luck that their 2012-13 equity Isas have so handsomely outperformed their cash Isa counterparts. A business investment and economic recovery still seems far away. But despite all this, could we be seeing the early stages of a great secular bull market for shares?
The reasons for caution on equity investment have been well aired. And investors are understandably cautious about opting for an equity Isa for 2013-14 after such a strong run in recent months. We are not, they fear, at the foothills of a Great Rise but at the peak of an opportunistic rally: time to snatch gains while you can.
But stock market investment is about the medium and long term, not for what the next few months may bring. And we need to be open to longer-term changes in the investment cycle.
Great bull markets have always started in the most daunting and unpromising circumstances: 1975, 1983-84, 1992 and 2003: at each one of these turning points the sky was black with worry and foreboding. And worry today we have a-plenty.
But after the worst financial crisis since 1929-33, and governments still wrestling with the debt consequences, there has been an unmistakable change in the air after five years of misery.
In America the housing market has stabilised, household confidence is recovering and unemployment is falling. China looks to have avoided a widely-predicted hard landing. Japan has pulled out the stops for economic growth, with policy changes that have driven the Nikkei 225 to a four-and-a-half-year high. And in the eurozone, sovereign debt fears have subsided, despite the latest political crisis in Italy.
For the first time since the onset of recession and stagnation, markets are looking not just to a less traumatic future but forward to a new post-crisis world. Private investor psychology is still deeply bruised by five years of shocks, disappointments and miserable headline battering. But there is now an alternative viewpoint to reckon with. Says Robert Farago, head of asset allocation at Schroders private bank: “There is nothing obvious to bring the market rally to a close. The biggest threat… is that sentiment has moved too far and too fast.”
And there are now several props to the argument that we are on the cusp of a new bull market. First, central banks are still in a mood to pursue monetary stimulus and hold off from any change in interest rates from current ultra-low levels.
Second, world trade has continued to grow, despite all those hand-wringing predictions about the Death of Capitalism. Third, US banks, notwithstanding the continuing transgressions of JP Morgan, are in a stronger and much healthier state compared with 2007.
Fourth, the US economy looks to be coming out of a traumatic shock (and 60 per cent plunge in the S&P 500) in better shape. Unemployment, both in the US and the UK, has been falling. And while there is a mountain still to climb by way of recovery here, shares on a five-seven-year view may continue to prove the better bet over bonds that they have proved over the past 12 months.
Says Kate Moore, global equity strategist at Bank of America Merrill Lynch: “The latest US payroll and housing data corroborate that the underlying economic fundamentals are improving. We are in the early stages of a new secular bull market in equities.”
One clear sign of returning confidence is the evident upturn in mergers and acquisitions over the past six months. Investec market guru Jim Wood-Smith, whose upbeat presentation at The Scotsman investment conference back in November has proved spot-on (but was greeted at the time with audience scepticism and head-shaking) believes we will see a big increase in the number of deals as the year progresses “and that this will be a significant factor in pushing equity valuations upwards”.
He added: “Last week gave us just a glimpse of the effects of this, with the soaring of Vodafone’s share price – in response to a resurgence of the rumour of a pending merger with Verizon Communications – alone adding an astonishing 30 points to the FTSE 100 Index.”
What are the threats to this view? No answers on a postcard, please – readers may feel no card would be big enough for their list.
But one trend that does give me concern is the growing trend towards investor buy-backs and special dividends. While cash pay-outs are pleasing to receive, these – together with the trend among companies of buying in their own shares – is a worrying pointer to a dearth of ideas – or business confidence – that such surplus corporate cash is not being invested in the development of new products or services.
We need such investment to sustain growth. And until we see a pick-up in business investment, the secular bull market thesis will lack that compelling validation.