Having started the year at 1,894, the FTSE All-Share touched a low of 1,593 in mid-March, at the beg...
Having started the year at 1,894, the FTSE All-Share touched a low of 1,593 in mid-March, at the beginning of the hostilities in Iraq.
Following a relatively quick end to the main conflict stage the market has since rallied strongly to 1950. After adding back income this equates to a total return of just over 6.0% in the first six months of the year.
So where do we go from here? At the beginning of this year we were of the belief that the UK market would do well to produce a total return in the region of 8%.
This was to be made up of the following components: 2.0% GDP growth, 2.5% inflation and 3.5% from dividends. The dramatic events of the past six months, namely the conflict in Iraq and the Sars outbreak, have done little to change this view.
There is increasing evidence that growth in consumer spending is beginning to cool down from the above-average levels of the past few years.
The housing market is slowing, as it becomes almost impossible for first-time buyers to afford properties in many areas of the country and remortgaging activity appears to be in decline as many homeowners have already refinanced.
With debt levels at record highs, a moderation in spending should actually be welcomed or there is a danger that greater problems are being stored up for the future.
Business investment, although likely to be better than last year's 3.0% decline, is not expected to show more than a moderate increase of around 1%. Although there is no doubt that the state of corporate balance sheets has improved over the past few years there still appears no real incentive for businesses to increase expenditure given the amount of unutilised capacity in many areas.
Government spending is expected to continue its recent rise although this is of course somewhat reliant on the health of the overall economy. There must be some concern in this area given that in order to continue with current spending plans the Chancellor is predicting GDP growth well above most independent forecasters.
With these factors in mind and little sign of any acceleration in economic activity we remain firmly of the view that the trading environment for most companies is set to remain testing.
Investors must come to terms with the fact that the total return from equities is likely to be considerably lower than that of the 1980s and the majority of the 1990s.
However with interest rates at 3.75% and likely in our view to go lower, equity investment should still prove relatively rewarding.
We believe that dividend income will remain a major investment theme, as it is likely to contribute a large proportion of the overall return.
It will be therefore be of vital importance to identify those companies able to prosper in this difficult environment and which have the ability to generate sustainable free cashflows
Many stocks yield more than cash and bonds.
Interest rates set to fall further.
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Square Mile’s series of informal interviews
Fallout from Haywood suspension
Launching later in 2019
£80bn funds under calculation