Despite a slight rally, UK equity markets appear set for another difficult quarter
The UK equity market is on course for its fifth quarter of negative returns in the past 18 months.
From 1 April to 26 June the FTSE All-Share has returned -0.23%, although this was superior to the -8.35% achieved in the first three months of 2001.
The only quarter in the past six when the All-Share has produced positive returns was July-September 2000 when it returned 0.71%. According to Lipper, which has looked as far back as 1987, this is the longest period in which the UK market has produced such consistent negative returns.
The All-Share's quarterly performance is worse than that of the S&P 500, which recorded negative returns for the fourth quarter of 2000 and first quarter of 2001. So far in the second quarter of 2001, it has produced a gain of 5.3%.
Within the All-Share, different parts of the market have produced varying returns between 1 April and 26 June. The Mid 250 is up 2.84%, the FTSE Small Cap is up 2.43%, while the FTSE 100 is down 0.96%.
Despite the fall in the FTSE 100 this quarter, many analysts are optimistic the UK is not on course for a full blown recession. Jeremy Lang, investment director at Liontrust, is confident the economy is not heading for a hard landing.
'There's not much sign in any of the traditional indicators of an early 1990s style recession,' he said. 'Consumer spending is steady, employment figures are relatively stable and there's a feeling of optimism in the markets.'
Lang believes the high number of profit warnings and subsequent reduction in investment spending is fuelling the downward spiral. The cost of capital, he argued, has been falling in real terms for the past 20 years but the return on capital has not. As a result, he said, companies have been able to increase production faster than consumers are demanding.
Lang believes the current bear phase is a fundamental market realignment. He said: 'This is not something that is going to go away very quickly. The downturn is going to be with us for the foreseeable future. Expectations have been raised to excessively high levels because of the one-way bull market we have seen over the past few years but, realistically, this market's poor performance is all part of a much longer-term cycle.'
This does not mean, he said, that reasonable returns cannot be made in the current market, although investors must be sensible about the returns they can expect. Stocks offering rapid growth and income will be difficult to find and the focus must shift to companies that are likely to offer good, if not spectacular, returns, he argued
Under such circumstances, more traditional old economy stocks offering reasonable dividend yields will be back in favour, according to Liontrust.
'It is possible the US may see a Japanese style 'L-shaped' recession,' Lang said. 'All the ingredients are there.'
Hugh Priestley, an investment director at Rathbone Unit Trust Management, agrees this is not a short sharp shock and compared the current situation with 1973-74. 'An old style bear tended to last about 18 months,' he said, 'and if that is the case now, it could be that we're not far off the bottom.'
Priestley is more optimistic than Lang, pointing to the relative strength of both the UK and US consumer sentiment as being crucial in any attempt to gauge the severity of the downturn.
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