The UK market is shrinking and this is due to a number of factors such as companies buying back shar...
The UK market is shrinking and this is due to a number of factors such as companies buying back shares and private equity buybacks that look like good relative value but are cheap in absolute terms. From an investment perspective, this shrinking is leading to both opportunities and difficulties.
Private equity, as well as M&A activity, will continue to provide support for a market running out of steam. But otherwise investors are probably going to see some pretty slim pickings over the next few quarters. The main problem is that for every ungeared pound of earnings a company has, it seems to be valued at the same basis as a highly geared company, and this cannot be sustained over the long term.
These correlations have to break down eventually and as investors wait for the event to occur they should look for individual catalysts at the stock level that will allow decent holdings in the short term to be built. In short, it is a stockpicker's market.
On the upside, strong dividend growth and favourable long-term interest rates mean investors are bound to see an active market and a certain amount of support for share prices. It is also anticipated that the Bank of England's Monetary Policy Committee will continue to keep official interest rates on hold over the short term, with rising inflationary pressures countering concerns over weak economic growth.
There has also been stronger than expected retail activity in November and December, but once again consumer demand seems to be lacking the impetus to keep this going, especially in the face of higher energy costs and concerns about prospects for the economy, which will also pose a risk to corporate profitability.
Food and general retail sectors will no doubt bear the brunt of these sentiments and an anticipated decline in sales growth could also erode company earnings.
One of the key risks for the market is the pressure from wage rises, which seems to be increasing in a number of sectors. Oil prices are proving to be unpredictable, which is still an issue for inflation and interest rates, although house price inflation seems to presently be under control.
People should not discount the threat of avian flu. It may be the stuff of tabloid headlines but there is a very real threat. In Italy, for instance, there have already been 30,000 job losses due to it and sales are down around 33%.
The price of corporate bonds is also a scary proposition, particularly with regards to how equities appear through the bond looking glass. The bond market looks expensive, with liquidity sending prices higher rather than creating more value. It is hard to fathom how a single B rating should be valued the same as a double A rating.
So equities may look fair against the bond market, but this is more due to the bond market being fully valued rather than the state of equities and, in and of itself, the equity versus bond argument has taken a very different shape.
If anything, companies to look out for include those standing to benefit from an expansion of capital expenditure - particularly within the technology, mining and energy sectors.
Expect M&A activity to continue
Higher energy costs negative for consumer
Avian flu is a real threat, already costing Italian jobs
Two global vehicles
'Further plug advice gap'
Must appoint separate CEOs and boards
Advisers do come out well
Will report to Mark Till