I'm sure I am not the only fund manager who hates being asked for his forecast for the market ove...
I'm sure I am not the only fund manager who hates being asked for his forecast for the market over the next year. It is not that I lack confidence or conviction. It is simply that I can anticipate so many different outcomes that I know today's best guess can be tomorrow's embarrassment. I certainly don't buy stocks and forget about them for a year so why should my market calls be so dogmatic?
Accordingly, you can imagine my delight when put on the spot by a colleague in marketing last December. As far as I could see 2003 was and still is a particularly difficult year to hazard a year-end forecast. The only thing I felt strongly about was that the year would see a number of quite distinct trading periods. The start of the year pessimism associated with Iraq, economic growth worries and life office solvency issues in the UK would eventually give way to more benign conditions. To match the mood swings from despair to optimism, it felt more sensible to look for both market highs and lows this year. To this end, I suggested and still stand by a low for the FTSE 100 this year of 3,200 and a high of 5,200.
I am reasonably hopeful that we will not see enough new negative news to see the earlier lows this year re-tested. To justify a bearish stance I think one needs to embrace the cause of deflation. This might be a desirable or necessary move in the bond market to justify the prevailing yields but I can't see this as the most likely outcome. The right time to have worried about deflation was two or three years ago as there was value to be had on the fear of deflation.
On the other hand it is not obvious that we are about to see the domestic or global economy suddenly shift up a gear or two and move to above trend growth. Indeed certain headwinds for the economy persist as I do think concerns over the stamina of the consumer are appropriate. This is not to say I expect the consumer to take a bath, simply that they will need to play second fiddle in terms of providing momentum to final demand in the economy after years of strength.
So what am I basing my more optimistic forecast on? To reach the 5,200 level on the FTSE 100 I am simply looking for renewed confidence in the market and the economy to be reflected in a re-rating. I am not assuming a strong and persistent recovery in company profits although I do think companies are getting to grips with their cost bases.
Putting the UK market on a P/E of 16-17 times is demanding but not outrageous. The more interesting point is whether it would be sustainable.
With the balance of risks seeming to favour additional progress by the market, I am inclined to stick with my move towards growth, duration and market-sensitive financials stocks. Many of these have demanding short-term ratings but look more attractive on only a slighter longer time horizon.
In contrast, defensive stocks, many of which have benefited from the robustness in personal consumption, appear set to lose their attractiveness.
More negative news unlikely.
Pessimism over Iraq faded.
Companies getting to grips with cost bases.
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