By Stephen Whittaker, a fund manager at New Star During the steep market sell-offs in July, it w...
By Stephen Whittaker, a fund manager at New Star
During the steep market sell-offs in July, it was easy to panic and develop an overly negative view of the world. But investors should pause and consider the economic fundamentals before falling into the trap of excessive pessimism.
Unemployment is the lowest it has been for a generation, inflation remains low and Government finances are in healthy shape despite the promised spending rises.
Observers are exaggerating the negative impact of stock market falls on UK households. Most British consumers are far more pre-occupied with house prices and their pay packets.
Given that the housing market is still bubbling along and low unemployment, coupled with public sector pay rises, is keeping the labour market firm, there is little to suggest, or even warrant, a sudden collapse in confidence.
I do not expect, however, the economy to roar ahead. Positive but unexciting economic growth will remain the order of the day, which should be sufficient to provide a floor to the equity market.
At the end of July, the price/earnings ratio on the FTSE All-Share Index was at its lowest level since early 1997 and the dividend yield had reached a respectable 3.6%, again not seen since early 1997.
That the widely followed FTSE 100 Index seemed to find a floor at 3,800 could indicate an acknowledgment there is good value available at these levels.
Indeed, investors may slowly begin to regain confidence, particularly if the headline-grabbing corporate scandals begin to fade.
The deadline in the US for CEO sign-off on accounts passed relatively calmly and has been greeted with a sense of relief by the markets. However, renewing investors' faith in corporate governance will take some time.
Similarly, cruel memories of the equity falls of the past two years will have scarred many investors, so we can expect an insistence on genuine, visible earnings and reasonable valuations for some time to come.
Leadership in any upturn is likely to come from financials, where any improvement in market confidence is likely to be amplified.
On the whole, British banks are offering attractive dividends, with provisions for bad debt proving relatively low for this point in the economic cycle. The insurance sector, battered by recent solvency worries, has endured some incredible share price falls. The Prudential insurance company lost nearly a third of its value during the high and low points of July.
A calm outlook on the market reveals some attractive valuations.
That the market may have overreacted in its race to sell equities during July is visible in the bounceback of Aviva, which, on 21 August, had risen some 57% from its July lows.
However, gentle growth will not make for a spectacular rally in share prices. We may have found a floor for equities but it will remain a stockpicker's market.
Investors will continue to favour value, with growth stocks having to wait until firmer economic figures appear towards the end of the year.
Bottom of market may have been found.
Economic fundamentals are healthy.
Clean corporate sheets a boost to confidence.
Pessimists could talk us into recession.
Racy valuations will continue to be shunned.
UK scandal could knock market.
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