Fund manager's comment/Ross Courtier
Set against the backdrop of a difficult year, it is gratifying to note that over the past couple of weeks, the FTSE 100 has once again tested the 5,400 level. While this bounce is a welcome relief, it is important to consider the short and long-term factors set to influence UK equities over the coming months.
Starting with the short term, the 5,400 level has now been tested twice, once back in March, and again in late July. On each occasion, the market has rallied swiftly and decisively from this point, which suggests genuine support at these levels.
While this sounds encouraging, we are not yet raging bulls. It should be noted that the recent rally has taken place amid very thin volumes and, though this is characteristic of summer, it does place a cap on the amount of confidence one can take from the recent rally.
A second point is that, because of these low volumes, the market can 'gap' severely, recording large price moves in either direction on the back of little real trading. This means that wiser heads with large pools of money to move may be wary of getting caught up in what maybe just a short-term summer holiday.
Looking beyond the recent rally, we must consider longer-term factors, and as always, we must turn to the economy. Of crucial importance to understanding the finely balanced nature of the UK at present is the emergence of the two-speed economy. On the one hand, consumer spending and borrowing goes from strength to strength. On the other, manufacturing has plunged into recession as the effects of the strong pound squeeze relative competitiveness, hitting exports badly. In light of the recent rate cut, it seems that the Bank has decided to act in favour of exporters, but it now risks fanning the flames of house price inflation.
For now, it seems that strong consumer spending will continue, but what does this mean for equities longer term?
Our guess is that, at some point over the next three to six months, the pace of consumer spending will begin to slow, most likely in response to an increase in unemployment. As companies react to the disappearance of profit margins seen this year, cost cutting and layoffs seem likely to rise. A reduction in production also seems likely, as firms attempt to shed excess inventory.
While we are pleased with the recent bounce, it probably represents little more than a short-term trading opportunity. More encouraging is the development and strengthening of the 5,400 support level, which may represent a base for longer-term growth. While the economy is likely to remain unbalanced in the short-term, the shake-out in industry is likely to cap the buoyant consumer longer term, but should provide a base for healthy stock market returns over a two to three-year view.
• FTSE 100 finding support at 5400 level.
• Consumer confidence remains high.
• Equities could build from current levels.
• Rally taking place amid thin volumes.
• Two-speed economy unbalancing makrets.
• Pace of growth could slow over long term.
Despite improved risk appetite
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