Over recent weeks, the UK stock market has bounced from September's lows but concern is rising over ...
Over recent weeks, the UK stock market has bounced from September's lows but concern is rising over whether the rally can continue against the weak economic backdrop.
Kevin Doran, a UK fund manager with Solus Investment Funds, believes the market has seen too much growth, too quickly, for it to be able to continue.
'Since 25 September, the All-Share is up 15.5% while the world indices are up 16%,' he says.
'This kind of growth is unsustainable and I think we will see people trying to lock in some of the short-term gains they've made recently.
'If anything, the underlying economic picture has got worse. Analysts have been forced to look further forward and widen their investment horizons.
'The earliest we're likely to get a clear picture of what is happening to the world markets is the first or second quarter of next year.'
Doran believes defensive stock valuations are now too high and cites food retailer Tesco, currently trading at 22 times earnings, and soap and detergent manufacturer Reckitt Benckiser, at 21 times forward earnings, as examples.
Although solid, companies such as these, he argues, cannot be considered to be operating in growth industries and are realistically unable to justify this kind of excessively high valuation.
'Defensive stocks have had their day,' says Doran. 'Growth will come from cyclical areas but the confidence in the market is not there at the moment. People are trying to get back into areas such as media, which is up 24% since 25 September, but doing so requires a leap of faith. By making that kind of move, you're saying that you think next year is going to be substantially better than this year.'
Instead of the rally continuing, Doran anticipates that the FTSE 100 will drop again but not to the 4,500 levels seen in September.
He believes a period of instability over the next few months will see index levels move between 4,800 and 5,100, before a recovery begins next year.
The view that the current bounce is a false dawn is one shared by Kevin Fenelon, a UK fund manager with Britannic Asset Management.
'We're looking to see a near-term correction but how long it turns down for is a moot point,' Fenelon says.
'The market has been quite resilient in the face of a lot of bad corporate news. We are seeing some poor statistics from the US again, with more job losses and profit warnings, which should precipitate the correction. It's a question of how much this bad news has been factored into stock prices already.'
Although negative on the prospects for growth in the short term, Fenelon is much more positive in the medium to long term, believing fiscal and monetary stimulus in the US will eventually filter through to world markets and spark a recovery.
The UK economy, which has survived the slowdown so far in relatively good shape, should be in a strong position for a V-shaped recovery following the correction.
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