Fund manager's comment/David Binnie
It is not difficult to find bull points for the UK market. The fundamentals are not bad and the market is cheaper than it has been for years. However, the current bear market is a worldwide phenomenon and the UK stock market cannot recover alone. While there are reasons to be bearish, I find the positives more convincing than the negatives.
First and foremost, the market is cheap. The P/E ratio is about 17x 2001 earnings with the prospect of further profit growth next year. This is as low as the rating has been for several years. This reflects the fact that the market has gone sideways for over three years yet during that time, profits and dividends have been rising and interest rates have come down, albeit erratically.
The UK economy is in good shape and in the US, where they have admittedly had a very sharp slowdown, there is evidence of stabilisation. In the UK, inflation remains low so the Bank of England still has scope to cut interest rates if things do get worse.
The slowdown in growth has in fact been quite modest in the UK and even that looks to have stabilised for now. The problem in the UK is one of balance ' the manufacturing/exporting sectors are suffering while the much larger service sectors are generally doing well. But this is not a new situation for the UK.
Sentiment is currently very poor. It can't get much worse so the next development is for it to get better.
On the negative side, there are more sellers than there are buyers and you can't get a more basic problem than that. One reason is the BT rights issue ' the largest ever in the UK ' that has sucked away £5.9bn of investors' buying power. Another is the overhang of Vodafone stock, the result of its worldwide buying spree, which has left some major investors with unwanted holdings that they are trying to sell.
There is also short selling by hedge funds and a lot of institutions seem to have been putting their money abroad recently. There are positive factors too of course such as Shell's enormous share buyback programme and the UK's higher weighting in global stock market indices but it seems the sellers have the upper hand for now and who knows when that will change? The technology bubble has well and truly burst and companies in the technology and telecom sectors are still feeling the fallout in a big way. We still get profit warnings every day from both sides of the Atlantic and these are hitting the market badly.
The European economy is continuing to deteriorate and, unlike the Americans, they are not using an aggressive interest rate policy to aid recovery. The UK does a lot of trade with the eurozone so we will also suffer and the beleaguered manufacturing sector will continue to struggle in particular.
UK market cheaper than has been for yrs.
BoE has scope for further rate cuts.
Equities look cheap against bonds.
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