The FTSE 100 is up some 3% on the year, which is great news. But we all know this progress has been ...
The FTSE 100 is up some 3% on the year, which is great news. But we all know this progress has been far from serene.
Indeed, there were times prior to the Iraq war when any sort of positive return seemed unrealistic.
With the conflict behind us and some degree of confidence returning to the markets, the question is where do we go from here?
In the medium term, we remain positive on the UK equity market.
The principal basis for this view is that valuations remain attractive across a range of metrics. This has not been diminished by the bounce from the lows.
In particular, we still see strong value against bonds. For example, the dividend yield looks favourable against index-linked government bonds.
Economic data has been mixed recently but the impact of the war in Iraq has clouded the figures. Our view is that the UK economy is set to deliver steady if modest growth in the current year.
There are signs consumer spending is slowing but we do not expect this to lead to a collapse.
Employment trends support this argument and, although the housing market is softening in certain areas, the continued favourable affordability ratios suggest a manageable slowdown is in prospect.
The manufacturing economy faces problems but the recent weakness of sterling against the euro provides some competitive advantage in the short term at least.
Furthermore, we expect policymakers to maintain the fight against the deflationary threat, as clearly acknowledged by Alan Greenspan recently, but share the frustrations at the lack of activity from the ECB.
There is scope for further interest rate cuts and a growing body of opinion the Federal Reserve Board will also adopt less conventional measures if necessary.
We believe efforts will be made to keep the bond market well bid until recovery becomes clearer. The medium-term story therefore remains intact in our view.
The shorter-term picture is a little opaque, however, and sustainable equity gains may be on a more incremental basis going forward.
Having run so far so fast, it would be no surprise, and indeed may be healthy, to see a period of consolidation in equities.
The next few weeks will be of particular interest both in terms of economic data releases and company earnings guidance.
There are tentative signs there are less earnings downgrades around ' the rate of attrition has slowed. If this trend is consolidated, it will be a clear positive for the market.
For the time being, we retain a relatively style-neutral exposure in the UK equity funds we manage. Areas favoured include telecoms, banks and aerospace.
We find it hard to detect value in defensive names and so have moved underweight sectors such as utilities and beverages.
Looking forward, we are gradually increasing exposure to cyclical stocks but are wary of those that have moved most rapidly since the bottom of the market and continue to tread carefully in this area of the index.
Valuation supported by economic data.
Relatively stable domestic economy.
Signs of improving earnings trends.
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