The FTSE 100 is rallying. Patrick Collinson asks if this is the start of a bull run, or is a bear market lurking with intent
As recently as 10 July, the FTSE 100 share index was languishing at 4,127, trading volumes were at record lows and there was a widespread feeling that the first green shoots had withered. Since then it has topped 4,600 and sales of investment funds to small investors have taken off. The Investment Management Association says net retail sales in June rocketed to £2.5bn, from £128m in the same month last year, while investment Isa sales hit a six-year high.
An investor confidence report published today by Lloyds TSB says “the tide is turning” and that inflows from its private banking clients into shares have risen for the first time.So is this the start of a bull run, or is it no more than a “sucker’s rally”?
The bull case
Ted Scott, equity strategy chief at F&C which runs around £100bn in assets, believes the UK’s economic recovery will be slow and fragile. But the price-earnings ratio of shares – a key measure of value – is 13.5, which assumes a 20% recovery in profits in 2010. That, he says, looks cheap against a long-term trading range of between 12.5 and 18. “If this is the first leg of a bull market, it will become apparent that we are past the worst. By the time it is obvious, the market will be a lot higher,” he says.
Jeremy Smith, manager of Neptune UK Equity, is also confident about a recovery in share prices rather than the UK economy. He is convinced the next great investment story is the Chinese consumer, and that the beneficiaries will not only be global stocks such as oil and mining conglomerates – which loom large in the FTSE 100 – but also consumer brand companies such as British American Tobacco and Unilever.
At Fidelity, where Tom Ewing runs the £400m UK Growth trust, there is more gloom about Britain’s economic prospects. But a third of the profits of FTSE 100 companies are made overseas and Ewing has high hopes for Chinese demand for products made by UK-listed companies, such as drinks group Diageo. He’s just back from a trip to Shenyang, a city north-east of Beijing, where two private housing developments are going up with a total floor space greater than London’s Canary Wharf.
“It can seem bleak here, but there is a lot to be optimistic about. The news from China is unambiguously positive. And don’t think you have ‘missed it’ because the FTSE has risen; it has only retraced part of the 40% fall it suffered last year,” he says.
The bear case
Our favourite doomster, David Kauders of Kauders Portfolio Management, was a lone voice warning the colossal build-up of consumer and bank debt would bring disaster. Today he’s no less pessimistic.
“It’s perfectly normal for stockmarkets to rally for long periods in a bear market,” he says. “The rally rarely retraces all the lost ground, while the downturns are steep and sudden.” He says there will be no real recovery while households and companies are repaying more debt than they are borrowing. “The idea that there is a new bull market is fanciful.”
Many big City investors think the recent rally will soon run out of steam. Barclays says equities are close to fair value with “choppier seas” ahead.
Bob Doll, chief investment officer for global equities at BlackRock, which runs $1.4tn (£854bn) in equities, says: “Investors are still cautious, evidenced by the amount of cash on the sidelines. And while second-quarter earnings reports are positive, they are largely the result of aggressive cost-cutting.”
He says markets could be unnerved by worse-than-expected inflation data or a slide in consumer spending once fiscal stimulus programmes dry up.