By Leigh Harrison, manager of the Credit Suisse Growth and Growth and Income funds The bull case...
By Leigh Harrison, manager of the Credit Suisse Growth and Growth and Income funds
The bull case for the market centres on the resilience of the UK economy and the relatively low valuation of the market. The economy looks healthy, government spending is rising, consumer confidence is high, unemployment low and, crucially, the housing market is buoyant. With low interest rates and low inflation, the UK looks set for a period of steady, if unspectacular, growth.
Add to this the fact top-down earnings expectations for the UK are modest and the valuation of these earnings starts to look attractive by recent standards.
Additionally, the current yield on the market is around 3.5% and growing, albeit modestly, which compares favourably to interest rates at 4%. Investor confidence is low following market falls but, for those prepared to believe in better times ahead, this may be an attractive level at which to begin acquiring equities. The bulls also see a speedy resolution to the crisis in the Middle East, implying a lower oil price and a smooth return to growth of the global economy, creating a favourable background for the UK market to begin to recover some poise.
In the gloomy corner, however, are the double dippers and deflationists who see a renewed recession in the US and weakening economies in Europe reinforcing deflationary pressures worldwide, generating a prolonged period of low growth at best.
While these are not new concerns, recent newsflow has tended to highlight them, indicating that rather than follow a conventional recovery path following interest rate cuts, the US economy, in particular, is faltering. The strong growth reported early this year was fuelled by restocking and weak follow-through demand has led to lower growth expectations going forward.
There are early indications US consumer spending is starting to slow down, raising fears the debt financed expansion of the 1990s has run its course. Unless investment spending picks up, this implies a period of limited growth.
The Middle East situation has also deteriorated so war is a real threat and the oil price has remained punishingly high, further sapping investor confidence.
In a global context, things do look materially worse than they did at the start of the year and investor caution is well founded. The current weakness of markets is recognition of the risks to growth. However, the authorities are acutely aware of the dangers of letting the economic environment deteriorate further and would probably act decisively, and aggressively, were this likely.
Accordingly, our central view is that the economy and market will muddle through the current uncertainty, growing slowly as consumers repay debt and companies restructure to protect profits. The UK market should move sideways but remain volatile as confidence rises and falls until the level of uncertainty is reduced.
The low valuation of the UK market is its key support and it is worth remembering that even within this market, there are businesses that will continue to deliver returns to shareholders without undermining the long-term value of the business and whose qualities will come to be more widely recognised once confidence rebuilds.
UK economy relatively healthy.
Valuations looking attractive.
Dividends showing modest growth.
Possibly of renewed recession in US.
US consumer spending staring to slowdown.
Threat of war in the Middle East.
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