Most UK investors are bullish about the equity market, but there are dissenting voices that predict s...
On one side, good global economic strength and signs that inflation will not run away provide a good backdrop to continuing equity strength. On the other hand, rising bond yields and high valuations indicate a negative.
Edward Bonham Carter, chief UK strategist for Jupiter Asset Management, falls into the former category.
He says: "The US will probably slow down a bit but still have strong economic growth. The UK is showing robust growth. There is a recovery in Europe and the Far East. This is a period of synchronised world economic growth."
Normally, such a period of growth would lead to inflation worries. But in the medium term there are various forces holding it down. Intensifying global competition is exerting considerable pricing pressure, while the advancement of technology, especially the increasing presence of the internet, is reducing barriers to entry in many fields.
Importantly for the markets, the downward pressure on inflation should have an appropriately subduing effect on rates.
Bonham Carter says: "Interest rates will remain low in nominal terms. It is difficult to tell what it will be in real terms but if they go up, it will not be by a huge amount."
One potential downside to the economic growth is the expansion of the commodities market. Input prices are already on the rise, according to Bonham Carter. This will not be a serious problem as long as it can be countered by productivity gains and this is already evident.
He says: "The application of technology in many industries has led to increases in productivity, especially in the computer industry, but elsewhere as well."
Furthermore, the company outlook is positive. The UK is showing good earnings growth - Bonham Carter puts it at 10% for the coming year.
Philip Wolstencroft, UK strategist for Merrill Lynch, is more bearish. He has examined the bond yield trends and P/E ratios of the whole market and expects a 9% fall in the FTSE 100 by the end of the year.
The circumstances that encouraged the bull market of the last decade - weak but consistent growth and falling bond yields - are now reversing. He says the prospective P/E ratio is approaching 20, so the stock market is five times more sensitive to bond yields than EPS.
Bond yield mirrors GDP and both have been rising since the end of 1998 and historically, equity markets have an inversely proportional performance to bond yields. From this, Wolstencroft calculates the fall in the equity market.
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